FriendTimes delivered soft 1H20 results, with topline/bottom line +34.5% /8.7% YoY. Topline was in line while earnings was below buy-side expectation of 15%-20% YoY. We suggest investors to look beyond 1H20 earnings, and expect profit to unlock in 2H20E after ToE breakeven. New games pipeline slightly delayed, but we expect minimal financial impact in FY20E. To reflect its existing games decline, we trimmed its earnings by 11%/5%/1% in FY20/21/22E, but maintain our TP of HK$4.0 (15x FY20E P/E) for industrial valuation rebound. Maintain BUY with low valuation. License of modern woman game would be the next catalyst.
- Soft 1H20 priced in. 1H20 revenue grew 34.5% YoY, in line with our estimates. Adj. net profit came in at RMB163mn, up 8.7% YoY, below market expectation of 15%-20%, mainly on existing games decline, deferred revenue and lower ToE contribution in 1Q and Android share (~20%). ToE still performed well in 3Q20E, and we keep positive on 2H20E earnings growth. We think market overreacted to 1H20 results, and we suggest to buy on dips.
- ToE intact in 2H20E. ToE kept stable at Top 15-20 in grossing rank in Aug (vs. Top 30-50 in Jan, Top 20-25 in Feb, Top 12-20 in Mar, Top 9-15 in Apr, Top 5-15 in May & Jun, Top 10-15 in Jul), with daily grossing at RMB3.0-4.0mn. We estimate its monthly grossing at around RMB100mn in Aug, (vs. RMB40mn/60mn/80mn/100mn+/120mn/120-150mn in Jan/ Feb/ Mar/ Apr/ May/Jun& Jul). ToE has achieved breakeven in 1H20, and we expect higher margin in 2H20E with lighter S&M efforts (50% of 1H20). ToE South Korea version was estimated to achieve breakeven in Oct, with RMB15mn monthly grossing. Mgmt guided 30% net margin for ToE, backed by higher paying ratio and ARPU.
- Minimal financial impact from pipeline delay. We suggest market to eye on further new titles in 2021E, including modern woman (1Q21), casual elimination and female Xianxia games. (e.g. <此生无白>). The delay of modern woman game & Fate: The Loved Journey would pose minimal financial impact, as we did not factor in other new games in FY20E forecast.
Maintain BUY. The stock is trading at 10x FY20E P/E, largely below industry average of 15x. We suggest to look beyond 1H20E results, and eye on new titles in 2021E. We trimmed its earnings by 11%/5%/1% in FY20/21/22E, but maintain our TP of HK$4.0 (15x/12x FY20/21E P/E) with higher P/E multiple for industrial valuation rebound (from 13.5x FY21 P/E to 15x FY21 P/E).
