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16 Aug, 2019 (Friday)



CHINA TOWER(788)
Analysis¡G
China Tower`s 2019H revenue reached RMB 37.98 billion, up 7.5% yoy; net profit increased by 110.6% yoy to RMB 2.55 billion. Domestic mobile phone manufacturers such as Huawei and Xiaomi have said that they will launch new mobile phones soon. The 5G landing time is getting closer and closer, and the demand for base station construction will increase accordingly. As of the end of July, the company has completed the construction and delivery of 7863 5G base stations, and the operators have opened 6324 5G base stations. It is expected that by the end of 2019, more than 10,000 5G base stations will be built.
Strategy¡G
Buy-in Price: $1.75, Target Price: $2.30, Cut Loss Price: $1.46



Perfect World (002624.SZ) - Remarkable performance in mobile gaming business

Investment Summary

Perfect World engaged in Film and TV series creation as well as Gaming development in China, together with strong game development and film production capabilities. Assuming a target P/E of 23x in 2019, we derived a TP of $34.37, 0.3% higher than previous TP. We maintain a ¡§Buy¡¨ rating, with a potential upside of 30.8%. (Closing price at 14 Aug 2019)

Interim result update

The revenue (excluding the cinema business) grew by 12.44% YoY, reaching RMB 3,656 mn. The net profit attributable to the owners was RMB 1,020 mn, up by 30.5%, while the net net profit attributable to the owners excluding the non-recurring gains and loss was RMB 973 mn, rose by 37.67%. The operating cash flow was RMB 167 mn. The gross profit margin was up from 59.6% in 18H1 to 68.6% in 19H1.

Business update

Gaming

The gaming revenue reached RMB 2,878 mn, up by 8.06% YoY. In terms of PC gaming, the performance of ¡§Perfect World¡¨, ¡§Zhu Xian¡¨, ¡§DOTA2¡¨ and ¡§CS:GO¡¨ all remained persistent. The Group are developing a new game, called ¡§Xin Zhu Xian Shi Jie¡¨ based on the IP of ¡§Zhu Xian¡¨. In terms of Mobile gaming, the revenue boosted significantly by 39.4%, thanks to the strong performance of ¡§Perfect World Mobile¡¨ launched in this March. It ranked the first in the IOS billboard for about 20 days. The ¡§Legend of Condor Hero Mobile¡¨ has also launched on July along with a top ranking in IOS. The Group are still developing games, such as ¡§Wo De Qi Yuan¡¨, ¡§Meng Huan Xin Zhu Xian¡¨, ¡§Xin Shen Mo Da Lu¡¨ and etc, which will fuel the growth in mobile gaming in the next few years.

Films & dramas

The revenue from films & dramas dropped by 22.4% to RMB 779 mn, due mainly to the sales of cinema business. In terms of dramas, the Group has launched ¡§I Will Never Let You Go¡¨, ¡§Qing Chun Dou¡¨, ¡§In Youth¡¨ and etc. ¡§I Will Never Let You Go¡¨ went into the top 3 in weekly drama of Zhejiang Television, while ¡§In Youth¡¨ also ranked the top based on the CSM55 ratings. In terms of films, the Group planned to maintain its strategic cooperation with Universal Pictures on film production.

Valuation

As the revenue growth in 19H1 of PC and console gaming was lower than expected, we lower the revenue in 2019F by 8.4% to 6.4%. However, we saw a significant improvement in GPM and a good cost control in both selling and administrative expenses. As a result, we only lower the net profit growth by 1.3% to 14.3%. Assuming a target P/E of 23x in 2019, we derived a TP of $34.37, 0.3% higher than previous TP due to the previous share buyback. We maintain a ¡§Buy¡¨ rating, with a potential upside of 30.8%.

Risk

1. Lower-than-expected growth in Mobile gaming

2. Giant entering the film & drama production

3. Loss in production team

Financials

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Recommendation on 16-8-2019
RecommendationBuy
Price on Recommendation Date$ 26.270
Suggested purchase priceN/A
Target Price$ 34.370
Writer Info
Terry Li
(Research Analyst)
Tel: +852 2277 6527
Email:
terryli@phillip.com.hk

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