China Mobile Games & Entertainment Group Fundamentals Still Solid; Buy into Dips

Oct 13, 2014 20:00 JST

HONG KONG, Oct 13, 2014 - (ACN Newswire) - CICC maintain "BUY" rate and raise the target price by 32% from US$19 to US$25 on China Mobile Games and Entertainment Group Limited ("CMGE" or the "Company")
(Nasdaq: CMGE), a leading mobile game company in China.

3Q14 rev. close to high end of guidance, pipeline strong
CICC expect 3Q14 revenue to grow 245% YoY / 23% QoQ to Rmb338mn, and non-GAAP NI to grow 213% YoY / 24% QoQ to Rmb78mn. Strong results were helped by Super Hero, Tiantian Hero, and increasing revenue from self-developed card & board games.

Trends to watch
Winner in the consolidation of mobile game publishing business.
CICC see that CMGE has benefited from mobile game publisher consolidation and has been taking more and more market share. CICC favor CMGE's independent role as a mobile game publisher and believe industry growth coupled with market share gains can help CMGE deliver strong performance.

Strong 4Q14 pipeline to contribute to rapid growth in 2015.
CMGE launched CA (FPS) and The New Legend (APRG) in late September, both delivered monthly gross billings of over Rmb20mn. CMGE has a robust pipeline in 4Q14, CICC believe Feng Zhong Qi Yuan (the same IP as the popular TV drama), Age of Discovery, Naruto and One Piece are among the most awaited games.

Management concerns to disappear with smooth operations.
The market is over-concerned with CMGE's management issues. As the company performs well, market concerns will gradually be erased, and corporate restructure will prove to be more efficient as margins improve.

Valuation and recommendation
CMGE's share price was at one point 100% higher than the last call in August; though it experienced a pullback due to systematic risk, the current share price is still 18% higher than the initial coverage on August 5, 2014. CICC lower 2014 EPS by 11.5% to Rmb8.6 and increase 2015 EPS by 10.3% to 15.4. CICC believe the recent correction provides a good opportunity to buy and raise the target price by 32% from US$19 to US$25, as removed the management risk discount of 20% and raised 2015 earnings forecast by 8.3%. Maintain BUY rating. TP represents 2014/15 PER of 18x/10x.

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