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Investor Notes - Phillip Securities (HK) Ltd
Past Investor Notes  
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18 Feb, 2021 (Thursday)

            
YINCHENG LS(1922)
Analysis¡G
Yincheng Life Service (1922) is a leading regional property management enterprise headquartered in Nanjing and deeply engaged in the Yangtze River Delta Megalopolis. It has expanded its business operations to the Jiangsu Province and several core cities in the Yangtze River Delta Megalopolis. As at 31 December 2020, the GFA under management and contracted GFA of the Group's property management services has reached over 39,000,000 square metres and 42,000,000 square metres, respectively. According to its positive profit alert, the Group is expected to record an increase in the net profit and core net profit attributable to owners of the Company for the year ended 31 December 2020 by not less than 100% and 45%. Such increase was mainly attributable to the increase in the Group's GFA under management, the increase in revenue generated from the provision of community valueadded services and the increase in gross profit generated from the provision of property management services to projects of the Group undertaken from independent third party property developers since such projects have now gradually entered into the mature period. (I do not hold the above stock)
Strategy¡G
Buy-in Price: $5.70, Target Price: $7.00, Cut Loss Price: $5.30


SMOORE INTL(6969)
Analysis¡G
Smoore International (6969) is a global leader in offering vaping technology solutions. According to Frost and Sullivan, the market shares of e-cigarettes and HNB devices among the tobacco products market is only 4.9% in 2019. Under the influence of tobacco control campaigns globally, the e-cigarettes and HNB devices market has grown significantly recently and its market share is expected to reach 12% in 2024, with a CAGR of 20%. The company is already the obvious leader in the global vaping device market, with a market share of 16.5%, 10% higher than the second largest participant in the sector. We believe the market share of the company can increase in the future and further strengthen its leading position in the market.
Strategy¡G
Buy-in Price: $74.00, Target Price: $81.50, Cut Loss Price: $70.00



Archosaur Games (9990.HK) - Negative profit alert due to the higher-than-expected R&D expense in 2020, but doesn`t change the company's long term value

Investment Summary

The company's adjusted net profit for 2020 fell 35%-40% yoy

The company issued a negative profit alert on January 21, that it is expected that the adjusted profit for 2020 will fall by about 35%-40% yoy. The main reason for the decline is the huge yoy increase in R&D expense and the delay in the launch of the games, causing a mismatch in return vs investment. According to the company's management, as of the end of 2020, the company has more than 1,200 employees, with 87% of them being R&D personnel. Further, the company has newly hired roughly 300 employees in 2020, of which about 90% of whom are R&D personnel. On the other hand, in addition to the R&D expenses brought by the new R&D personnel, the company also mentioned that since the company's original R&D team is one of the few R&D team in China who can effectively apply UE4 engine on mobile game development, hence the average salary of the team has increased by a certain amount in 2020. In the long run, we are confident in the company's R&D capabilities. The salary increase of the company's original R&D team in 2020 can bind the company's outstanding R&D talents and reduce the loss of R&D personnel. At the same time, the expansion of the R&D team will help the company to explore game genres other than MMORPG. Further, the company's continuous and substantial R&D investment can help the company maintain competitive advantages in the game industry that is gradually shifting toward premium games. We believe that with the successive launch of the games in the pipeline, the company's profit margin will rebound.

Noah's heart (¿Õ¨È¤§¤ß) is expected be launched in 2021 year-mid

Noah's heart (¿Õ¨È¤§¤ß) is expected be launched in 2021 year-mid. Noah's Heart (¿Õ¨È¤§¤ß) is an open world MMORPG game based on UE4 and the company's own IP, and introduces new designs and gameplay such as the 8000x8000 spherical seamless big map. The company has spent a lot of investment in the design of the spherical seamless big map of the game. The introduction of the seamless big map eliminates the loading time when the game scene is switched, which can greatly enhance the continuity of the game and gamers` gaming experience. As for the design of the spherical map, it can make the gameplay more realistic. Up to now, Noah's Heart (¿Õ¨È¤§¤ß) has no other competing products in the market. After the game is launched, it is expected to become a hit MMORPG game. Tencent will be responsible for the distribution of the game in China region, which fully demonstrates Tencent's high recognition of the game. At the same time, Tencent's strong game distribution capabilities and traffic support can greatly increase the gross billing performance of the game. According to the company's management, in addition to the China region, Noah's Heart (¿Õ¨È¤§¤ß) will also be launched in overseas markets, including Europe, America, Japan and other regional markets. Given that the R&D team has incorporated a lot of elements from the US and Europe market in the design of the game, so we are also optimistic about the overseas distribution of the game.

We believe that the excellent performance of Genshin Impact (­ì¯«), also an open world game, in both China region and oversea regions have shown that market potential of an open world RPG game. At the same time, Genshin Impact (­ì¯«)'s distribution has also explored many potentials gamers for Noah's heart (¿Õ¨È¤§¤ß).

The company will focus on strengthening the ability of independent distribution in China region

In recent years, with the changes in the Chinese game distribution channels, the company has strategically chosen to cooperate with Tencent in the game distribution in China. Under the escort of Tencent, the company's games have all achieved eye-catching performances. In the future, the company will focus on strengthening its ability of independent distribution in China region. We believe that the close integration of R&D and distribution operations can effectively lower the communication barriers between the R&D team and the distribution team, allowing the distribution team to formulate a more refined distribution strategy based on the characteristics of the games, thereby greatly increasing the performance of the games after launching. In the future, the company will focus on hiring distribution experts in various vertical fields (including SLG and female-oriented game genres), with the aim to build a top tier game distribution system.

Valuation and investment thesis

We continue to be optimistic about the company's strong R&D capabilities and high probability of hit game output. Considering 1) the delayed launch of Under the Firmament (ÂE¹Ï¤§¤U) and The New World (¹Ú·Q·s¤j³°) have a higher impact on the company's actual gross billing than we previously predicted 2) The launch of Noah's Heart (¿Õ¨È¤§¤ß) will be delayed until mid-2021 3) The company's higher-than-expected R&D expense, we lowered the company's adjusted net profit for 2020/2021/2022 to RMB 215/714/1043 million (-63.1%/-34.9%/-29.8%). We have rolled over the relative valuation to 2022 and maintain target adjusted PE of 20x. Our Dec-22 TP is HKD 30.10, with corresponding 2020/2021/2022 adjusted PE at 94.1x/29.2x/20.0x. We maintain Buy rating. (Market closing price as of 10th Feb) (exchange rate: RMB 0.85/HKD)

Risk

1) The tightening on Game regulations 2) The Games underperform comparing to expectation 3) Games launching are delayed due to unexpected reasons

Financial Statements

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Recommendation on 18-2-2021
RecommendationBuy
Price on Recommendation Date$ 20.550
Suggested purchase priceN/A
Target Price$ 30.100
Writer Info
Kevin Chiu
(Research Analyst)
Tel: +852 2277 6514
Email:
kevinchiu@phillip.com.hk

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