Published December 23rd, 2014:
China’s largets mobile gaming developer and publisher CMGE, listed in the US, has had a strong 2014 so far. In the recent Q3 2014, the company reported total net revenue of USD 58.3m, an increase of 30.2% from the previous quarter. Y-o-y the revenue growth was no less than 264%. Unlike many other mobile gaming companies, CMGE is also steadily improving its margins. Q3 2014 gross profit margin was 64.9%, an expansion from 61% for the previous quarter. Operating margin was 20.4%, an expansion from 15.9% from the previous quarter. Net income for the third quarter was USD 12.3m, an increase of 37% from the previous quarter. Basic and diluted EPS were USD 0.39 and USD 0.38 respectively.
Already at this stage we can make a quick sanity check. Annualising the Q3 EPS number of USD 0.38 gives us a full-year EPS of USD 1.52. CMGE’s share price is currently trading around USD 19, implying a PE-ratio of 12.5x on the annualised 2014 earnings. The real 2014 EPS is likely to be higher given the continuous growth which is expected for Q4 2014.
In an outlook statement given in connection with the Q3 2014 report, CMGE management conservatively guides for a sequential revenue increase in Q4 2014 of up to 12%.
The growth that CMGE is experiencing is coming both from the overall underlying market and new games, both in-house developed and through its publishing business. In the third quarter, CMGE launched its MMOARPG, The New Legend and War Valley II. The company has been intensifying its R&D efforts, working on 17
self – developed games products including Naruto, One – Piece, Samurai Spirits, Shaolin Temple, Feng Zhong Qi Yuan, Ikkyu San and Hello Kitty. CMGE intended to begin launching these self – developed games beginning from the fourth quarter, so some of them will already be able to contribute nicely to the FY 2014 numbers.
Successful recent game launches
In September, CMGE launched a MMOARPG, The New Legend, for which it had obtained the IP rights from Shanda Games. The New Legend was ranked number 3 in the iOS paid rankings, number 7 in free rankings and number 20 in gross billings rankings with average DAUs of over 100,000 for a period of timein September while gross billings for October were more than RMB10m. In addition, in October, CMGE’s MMOARPG War Valley II was launched on four major Korean platforms and was ranked number 1 in free rankings in T – store, number 1 in download rankings in Google Play and number 1 in popularity rankings in T – store and Kakao Talk. Elsewhere, CMGE said that it we will conduct closed beta testing for its self – developed game Feng Zhong Qi Yuan, for which the company has obtained exclusive rights to base the game on the TV drama of the same name. The TV drama debuted on October 1 2014 and has been very popular in the Chinese TV rankings. In addition to these new product launches, the existing self – developed card games have continued to record strong growth. The company’s single – player games also have been driving the growth and the company stated in connection with its Q3 2014 report, that it believes that the performance of its self – developed games in 2014 provide strong support for CMGE’s position as one of the world’s top leaders for mobile game development. As an interesting fact, CMGE’s self – developed single – player games revenue for the third quarter increased 244.7% compared with the previous quarter.
Expanding publishing business
In the third quarter, CMGE placed special emphasis on adding e – sports mobile games, including games with first person shooter, or multiplayer online battle arena, and dance themes. As an official mobile game title in the World E – sports Championship Games, Crisis Action, a CMGE, one of the world’s first FPS competitive mobile games, performed extremely well. Within the first 15 days of its launch, the game’s DAUs reached 1.8m. In October, Crisis Action generated monthly gross revenue of over RMB10m. Based on CMGE’s self – developed IPs, The Last Battle, an official MOBA mobile game titled in WECG in the Hero’s Blade series, underwent closed beta testing in October as well. The Hero series has been continually successful so far with Super Heroes and Tian Tian Ying Xiong becoming the drivers in the publishing business during the third quarter. Another game title in the Hero series called The Heroes of the Three Kingdoms will begin closed beta testing in November. In addition, Unchartered Waters 5, the title exclusively licensed from Tecmo Koei underwent its first round of closed beta testing in August, and has started a new round of testing in October. CMGE has also licensed a 3D RPG game called Dao Mu OL to publish in Mainland China, Hong Kong, Macau and Taiwan. Another 3D ARPG game called Wo Zhu San Guo for CMGE has obtained the publishing rights in Mainland China, Hong Kong, Macau, Taiwan and
Korea. In 3Q, CMGE launched five games overseas, including Chao Shen Xue Yuan, Chao Shen Lian Meng, Kan Wo 72 Bian in Hong Kong, Macau and Taiwan. Chao Shen Xue Yuan was ranked number 4 among the bestselling games in Taiwan’s Apple App Stores. CMGE also launched Age of Tank in Russia and Korea. For 4Q, CMGE had planned to launch Crisis Action overseas and launch An Hei
Chuang Shi Shen and Qin Shi Ming Yue 2 in cooperation with Chang You in Hong Kong, Macau and Taiwan. CMGE’s overseas business is expanding in terms of intellectual property, especially in the area of animation and classic games, CMGE has established partnerships relating to One – Piece and Ikkyu from Toei Animation, Naruto from GREE, Unchartered Waters 5 from Tecmo Koei and Samurai Spirits from SNK Playmore, etc. CMGE has also obtained the publishing rights in China for the Android version for King of Fighters ’97, Samurai Spirits II and Metal Slug 2 from SNK Playmore. Recently, CMGE has been granted the mobile game rights to develop games based on the 12 well – known cartoons IP including Hello Kitty, Melody, Little Twin Stars from Sanrio in Japan. In the area of television, CMGE has obtained exclusive right to produce mobile games based on TV series Feng Zhong Qi Yuan, which is produced by the top TV producer Tang Ren Ying Shi in Mainland China. In the area of online fiction, CMGE obtained the rights from Tencent to develop an MMOARPG game based on the famous online fiction called Ze Tian Ji, which is expected to be launched by the end of first quarter of 2015. In addition, CMGE has also obtained the rights from Shaolin Temple to develop mobile games with themes based on the Shaolin Temple.
Although these Wi – Fi partnerships are still in the early stage, we believe CMGE believes that its user acquisition resulting from this strategic alliance with Chinese public Wi – Fi leaders will develop a positive impact in the upcoming few quarters.
So things are going well for CMGE. Therefore it is not surprising that Mr. Ying Shuling, CMGE’s COO and Mr. Ken Xiao, CMGE’s CEO have recently purchased large amounts of shares, worth RMB10m each.
Clearly undervalued versus peers
King (KING), Zynga (ZNGA) and Glu Mobile (GLUU) are three of the typical investments that give investors exposure to the mobile gaming segment. All are listed in the US, like CMGE, and all of them trade at significantly higher multiples compared with CMGE.
In the case of King, analysts currently expect a 2014 EPS of USD 2.22 and a 2015 EPS of USD 1.96. In combination with a share price of USD 16.10 this implies a PE-ratio of 7.3x for 2014 and 8.2x for 2015. For Zynga, analysts expect a loss of 0.01 per share for 2014 and an EPS of 0.03 for 2015. In combination with the current share price of USD 2.82m this implies a PE-ratio of 94x for 2015. For Glu Mobile, analysts expect a 2014 EPS of 0.24 and a 2015 EPS of 0.22. With a current share price of USD 4.15 this implies a PE-ratio of 17x and 19x respectively.
For CMGE, analysts currently expect a 2014 EPS of USD 1.37. We note here that this number sounds rather low, given the annualised EPS of USD 1.52, following Q3 results. Here could be room for a positive surprise once Q4 numbers will be presented. For 2015, analysts currently expect an EPS of USD 2.36. In combination with a current share price of around USD 2.36, this implies a 2014 PE-ratio of 13.9x and a 2015 PE-ratio of 8x. CMGE is outgrowing its competition rapidly and is still trading at a discount to the sector. This seems unjustified to us. The “Chinese-discount” that the US market certainly applies should be more than offset by the extra-ordinary market circumstances CMGE is enjoying, including the unique distribution set-up. The regular Western gaming companies all have to go the “normal” way via Apple’s app store and Android’s Google Play.
In our opinion, CMGE is the best way to play the continuous growth in the mobile gaming industry.