On August 18th 2014, China Mobile Gaming and Entertainment Group (NASDAQ:CMGE) announced an impressive set of Q2 2014 results. Q2 revenues increased by 281% y-o-y and amounted to RMB 274.6 million (US$44.3 million). Sequentially, revenues increased by 28%. Net income amounted to RMB 54.9 million (US$8.8 million), which compares to a net loss of RMB 12.6 million in the second quarter of 2013 and net income of RMB 34.7 million in the first quarter of 2014.
Company guides for 25% q-o-q revenue growth in Q3
The strong growth is driven both by CMGE’s self-developed games as well as its publishing business, according to the company. The outlook was positive as well and management stated in the Q2 2014 report that it believes that its self-developing business growth will continue in the second half of 2014 and its publishing business will also record solid growth. In terms of guidance, CMGE said revenue for Q3 2014 will be between RMB 330m and RMB 350m, i.e. around 25% above Q2 2014 levels. It plans to launch a total of about 20 self-developed and 50 third-party mobile games this year.
CEO Ken Xiao Jian said CMGE’s expansion has been helped by its strategic cooperation with Taiwanese semiconductor firm MediaTek, the largest supplier of mobile phone chipsets on the mainland. MediaTek, which has a 3.9 per cent stake in CMGE, pre-installs the mainland firm’s gaming app in products from more than 400 mobile brands, including smartphones from leading mainland players such as ZTE, Coolpad Group and Oppo Electronics. Said Mr Xiao: “We have pre-installed our Game Centre application in over 35 million handsets in the first half of this year, and we are on target to pre-install this application in over 80 million handsets for the full year.” That was higher than the 60 million total last year.
MediaTek has forecast total domestic 4G smartphone shipments will be from 120 million to 150 million units this year. Most of that volume is expected to be achieved during H2 2014 as smartphone suppliers race to meet demand from 4G subscribers on China Mobile, China Unicom and China Telecom.
Strong growth in Chinese mobile gaming market
China is experiencing strong growth in the mobile game market. According to research firm Analysys, the total market size of mobile games in China reached RMB12.1 billion in 2013, representing a CAGR of 54.3% from RMB3.3 billion in 2010, and is expected to grow at a CAGR of 52.3% from 2013 to 2016 to reach RMB42.7 billion in 2016. CMGE is one of the main players in the Chinese mobile gaming market and ranks number 1 among China’s mobile game publishers with 18.1% of market share in China (in terms of gross billings), according to the 2014 First Quarter Mobile Game Market Analysis Report published byAnalysys International. That is actually an increase compared with the Analysis Report published in February when CMGE’s market share was said to be 17.9% of gross billings generated by all mobile game publishers in China in 2013.
Another important point in the Q2 2014 report was the successful completion of the organizational reorganization of CMGE’s publishing business. The restructuring included personnel changes, relocation of employees and reassignment of managerial roles in the game publishing business. The primary purpose of the restructuring was to streamline the Company’s operations, increase efficiencies and better position the Company for profitable long-term growth. The restructuring caused temporary turbulence in CMGE’s share price since rumors were spread that some of the company’s representative had engaged in bribery. This allegations were, however, proven to be without substance.
Insiders are buying
On top of the very positive Q2 2014 report, CMGE also recently announced that CEO Xiao and COO Shuling Ying intend to individually purchase RMB 10 million (around USD 1.6m) each of the Company’s American Depositary Shares. That is a bit more than the usual pocket money and should be interpreted as a strong sign of confidence in the company’s outlook. Mr. Xiao and Mr. Ying have informed the Company that the share repurchases will be completed within two months of the original press release (i.e. up until October 18th) and will be financed with their own personal funds. CEO Xiao commented: “Management share purchases reflect the confidence that we have in CMGE’s future and our ability to drive long-term growth.”
Very attractive valuation
According to analyst estimates compiled by Yahoo Finance, CMGE is currently trading at a PE-ratio of 15x expected 2014 earnings and, more importantly, 9.6x expected 12-months-forward earnings. The implied PEG of 0.16 for 2015 emphasizes how cheap CMGE is at current levels given its strong growth. In comparison, US mobile gaming developer and publisher Glu Mobile (NASDAQ:GLUU) is currently trading at a PE-ratio of 27x expected 2014 earnings.
A company that is expected to grow earnings by 173% this year and a further 60% next year should be trading at a 12-months-forward PE-ratio of well above 20x. Prudently, applying a PE-ratio of “only” 20x on the estimated 2015 EPS of USD 2.27 implies a target price of USD 45.4, more than 100% above today’s share price level of around USD 22.