We expect FriendTimes (“FT”) to see a strong quarter in 1Q20E, benefiting from: 1) more MAU and time spent shift to online leisure for the epidemic outbreak; and 2) eye-catching performance of newly-launched Tale of Empress (<浮生为卿歌>). Given recent sector valuation rebound and FT’s strong grossing of new titles, we lifted FT’s TP from HK$1.4 to HK$2.0 (implying 10x/7x FY19/20E P/E), with earnings forecast unchanged. Valuation is still attractive. Maintain BUY.
- Potential new titles rollout ahead. Apart from <Tale of Empress>, there are several new titles in 2020 pipeline (e.g. Fate: The Loved Journey <此生无白>), most of which are female-oriented. For conservative estimates, we forecast insignificant revenue contribution from new titles except for Tale of Empress and Yokai Kitchen (<精灵食肆>). But we keep positive on its solid game pipeline and further grossing upside.
- Strong <Tale of Empress> to bring upside. After launch on 31 Dec 2019, Tale of Empress (<浮生为卿歌>) delivered eye-catching performance. According to App Annie, Tale of Empress ranked Top20-50 in iOS grossing rank, and climbed to Top 15 on 9 Feb 2020 (Apple store rank). We estimate its monthly grossing at RMB40mn in Jan, and daily grossing up to over RMB2mn in Feb. We see high visibility for its daily grossing to continuously increase, if version update is executed well. The coronavirus epidemic might affect its R&D productivity in the short term for holiday extension, but S&M effort is not impacted. We believe FT will strategically invest in its key title in terms of user acquisition and content update in 1H20E. Coupled with healthy operation metrics of existing games (such as Legend of Empress (<熹妃传>), Royal Chaos (<熹妃Q传>), we expect FT to see a strong quarter in 1Q20E.
- Mobile games to benefit from epidemic. We expect game comps to benefit from the epidemic outbreak, with more time spent shift to online leisure & MAU in the CNY. Mobile games could directly benefit, while PC games not (less operation of internet café). Game sector saw price rebound in recent weeks, with valuation up to over 20x FY20E P/E.
- Maintain BUY. Given recent game sector valuation rebound and eye-catching performance of key titles, we lifted our TP from HK$1.4 to HK$2.0 (implying 10x/7x FY19/20E P/E), still largely lower than industry average. More catalysts to come: 1) solid FY19E results; 2) rising Tale of Empress and launch of new titles; and 3) potential dividends.
