We expect Perfect World (“PW”) to keep its solid game momentum and see potential entertainment recovery, backed by valuable IPs, strong development team and high-quality productions. We forecast PW to deliver 11%/17% revenue/earnings CAGR during FY18-21E. Initiate with BUY with DCF-based TP RMB49.
- A leading game & entertainment player with valuable IPs. As a PC game pioneer, PW successfully transferred its strategic focus on mobile games, and developed notable IP-based titles, such as New Jade Dynasty Mobile (新诛仙) and Perfect World Mobile (完美世界手游). We forecast PW to deliver 11%/17% revenue/earnings CAGR during FY18-21E, thanks to its solid game and entertainment pipeline.
- Game: rich game portfolio to maintain strong momentum. Backed by valuable IPs and strong development team, PW had rich game pipeline in 2H19E, including New Swordsman Mobile (新笑傲江湖), Nightmare, New Forsaken World (新神魔大陆), etc. We expect its rich game pipeline will continuously boost ongoing growth in 2020E, supported by stepping-up new games introduction and launch. We forecast its game sector to grow 23%/14% YoY in FY19/20E, in which PC/ mobile games to deliver 5%/39% YoY growth in FY19E.
- Entertainment: more high-quality productions to come. Film industry in China faces multiple challenges in 2019, including flat industrial growth and tightening regulations on celebrity, content and pipeline. Given recent film headwinds, we expect PW’s entertainment segment to bear pressure in FY19E, but keep positive on it recovery in FY20E, supported by its strong pipeline with high-quality TV dramas and movies.
- Initiate with BUY. We initiate BUY with DCF-based TP of RMB49, implying 26.7x P/E in FY20E. We think the majority of PW’s solid FY19E financials have been partly priced in, and PW’s positive price drivers and catalysts originate from: 1) further performance of new games; and 2) stepping-up contribution from entertainment after regulation headwinds.
