Barclays Maintains "Overweight" Rate and Raises the Target Price to US$32.00 on China Mobile Games & Entertainment Group (Nasdaq: CMGE)

Nov 19, 2014 12:36 JST

HONG KONG, Nov 19, 2014 - (ACN Newswire) - Barclays issued a report on China Mobile Games and Entertainment Group Limited ("CMGE" or the "Company") (Nasdaq: CMGE) on 18th November, 2014. The stock rating maintains "Overweight" and the target price has raised by 3% from US$31.00 to US$32.00.

CMGE delivered another a strong set of results, with 3Q14 total net revenues increasing 265% y/y (30% q/q) to US$58.3mn and GAAP operating margin improving to 20.5% from 15.9% last quarter and -1.9% a year ago, thanks to continued growth in both self-developed games (Joyful Da Yin Jia) and publishing games. With an enriched pipeline coming from diversified acquired game IP, CMGE is aiming to deliver sustainable growth from a higher-quality games portfolio and improve operational efficiency in its game publishing business. Barclays fine-tune the revenue and earnings assumptions to reflect latest pipeline and launch schedule. New price target of US$32 (from US$31) is based on 15x (unchanged) revised 2015E non-GAAP EPADS of US$2.13 (from US$2.10), implying a PEG ratio of 0.28x, which Barclays sees as reasonable considering the strong earnings growth offset by the hit-or-miss nature of new games. Barclays maintains the Overweight rating.

3Q14 revenue breakdown: Management noted that the current revenue split for self-developed and publishing games is 50:50, with the top five games contributing about 60% of the total (Joyful Da Yin Jia ~25%, Super Hero 15%, SanGuoZi 8%).

4Q14 guidance solid, margins improving: CMGE guided 4Q revenues to be US$61.9- US$65.2mn, +159-173% y/y and 6-12% q/q. Gross margin improved to 64.9% in 3Q14, vs 61% in 2Q14 and 58% in 3Q13, mainly due to leverage and stable revenue sharing; non-GAAP operating margin improved to 22.6% Barclays model 4Q14 total revenues at US$64.2mn (+169% y/y) and non-GAAP operating margin at 22%, flat from 22.6% in 3Q14.

Strong pipeline: By successfully securing top game IP such as One-Piece, Naruto, Shaolin Temple and Uncharted Water 5, CMGE's pipeline is getting richer and more diversified. Barclays believes CMGE has proven its ability to execute and operate multiple successful games on its platform. As more new games are slated to be released in 2015, Barclays expect CMGE to leverage its publishing position to capture the strong growth prospects of online games.

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