IGG (799 HK) Buy (maintained) Target price: HK$3.75. Strengthened global operation and development capability; maintain Buy but cut TP to HK$3.

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1 Equity Research Information Technology IGG (799 HK) Buy (maintained) Target price: HK$3.7 Strengthened global operation and development capability; maintain Buy but cut TP to HK$3.7 Lowerthanexpected 2Q results IGG reported lowerthanexpected adj. net profit of US$11.m in 2Q, down 44% YoY or % QoQ, 31% below Bloomberg consensus. 2Q revenue of US$m was up % YoY, but down 6% QoQ. The QoQ decline was mainly due to the maturity of existing games and the small contribution from new games as most new games are planned for release in 2H. Operating margin dropped by pp YoY, or 6pp QoQ, to.4% in 1H, mainly due to an increase in R&D and marketing expenses for new game development and promotion. The company declared an interim dividend of HK$.4, amounting to US$7.4m, representing a dividend ratio of around %. Ryan Zhu, CPA SFC CE No. BDK8 zhuran@gfgroup.com.hk Joseph Ho, CFA SFC CE No. AFP8 josephho@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited 29/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance % 8% % % % % % More balanced revenue mix Its core game Castle Clash maintained stable strong revenue of US$28m in 2Q (% of the total), down 6% YoY or 9% QoQ, after being in operation for two years. Clash of Lord posted sales growth of 1% YoY but was down 19% QoQ to US$8m (16% of the total). Launched in 2H14, Deke Heroes saw strong momentum with 4% QoQ growth in revenue to US$4m (8% of the total) The company now has a more balanced revenue mix with the revenue contribution from Castle Clash down 7pp to % in 2Q, versus 62% one year ago. Strengthened global operation and development capability Two new key mobile games have been launched so far this year Final Fable in Jun and Game of King in Jul which have recorded average performance. The company plans to promote Final Fable in Japan and rebuild Game of King and hopes to post improvements in performance in the next few months. Around ten games will be launched before the yearend, mostly in 4Q, including Age of Kingdoms and the Japanese version of Final Fable, on which the company has high expectations. Along with the establishment of eight overseas branches (three new Asian branches, including in Korea, Japan and Thailand in 1H), the company continues to enhance its global development and operating capability. Its development team now has staff, including an exclusive outsourcing team of over staff in Taiwan. The strong development and operation teams should help to ensure sustainable growth for the company. Maintain Buy We partly took future M&A expectation into account in our previous forecasts. However, as the company has suspended its plan to acquire a large overseas gaming company due to stock market volatility, we revise down our revenue and net profit estimates for by 21% and 3% respectively. We still favor the company given its strong global operation and development capabilities, and significant M&A potential given its abundant financial resources. Following the 24% share price correction MTD, the stock is trading at an undemanding excash P/E of 7x. We maintain our Buy rating but cut our target price from HK$6. to HK$3.7, based on SOTP valuation with an excash P/E of x and a cash value of HK$1.2 per share. % % IGG HSI.HI Risks Key risks include fasterthanexpected decline of core games, poorerthanexpected performance of new games, and risks related to overseas operations. Source: Bloomberg Key data Aug 31 price (HK$) 2.93 Shares in issue (m) 1,394 Major shareholder Cai Zongjian 31.83% Market cap (HK$ bn) 4.9 3M avg. vol. (m).62 W high/low (HK$). / 2.62 Source: Bloomberg Stock valuation Turnover YoY Adj. net profit Adj. EPS (US$ cents) YoY P/E (x) BPS (US$) E E E P/B (x) ROE ROA Div. yield

2 Figure 1: 2Q results Year end Dec 1Q14 2Q14 3Q14 4Q14 1Q 2Q YoY QoQ Mobile games % % Web and Client based games % % Turnover % 6% Cost of sales (11.9) (13.4) (.2) (18.3) (16.7) (.1) Gross profit % % GPM 73.% 71.9%.8% 69.8% 68.9% 69.9% 2.1% 1.% Other income and gains Selling&marketing exp. (11.1) (8.) (.3) (13.7) (.8) (11.7) 4% 8% Admin exp. (3.) (3.4) (4.8) (.) (.) (4.8) 42% 12% R&D costs (3.3) (3.6) (4.8) (.6) (.6) (7.3) % % Operating profit % % OPM 34.1% 43.3% 37.4% 29.% 29.2%.4% 19.9%.8% Pretax income % 22% Taxation (1.) (1.4) (.8) (1.9) (1.) (.9) Tax rate 7.% 6.8% 4.4% 11.4% 6.7% 7.%.7%.8% Net profit % 22% NPM 31.%.3% 34.8%.3% 26.% 21.6% 18.7% 4.4% Adjusted net profit % % Adj. NPM 31.4% 41.6% 36.4% 26.3% 27.6% 22.8% 18.8% 4.8% Figure 2: Quarterly revenue and gross margin trend Figure 3: Quarterly adj. net profit and net margin Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q 2Q 66 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q 2Q Quarterly revenue Gross margin Adjusted net profit Adjusted net margin Figure 4: Revenue mix by region Figure : Revenue breakdown by game FY13 FY14 1H Others Europe Asia North America FY13 1H14 2H14 1H 2HE Others Texas Hold'em Deke heros Clash of Lords Castle Clash Page 2

3 Figure 6: Earnings forecast revisions US$ m New Previous Chg FYE FY16E FY17E FYE FY16E FY17E FYE FY16E FY17E Revenue % 27% 33% Adj. net profit % 34% 39% Adj. EPS (US$ cents) % 3% 39% Gross margin Net margin (.4) (3.1) (3.1) Figure 7: Revenue and gross margin forecasts Figure 8: Adj. net profit and net margin forecasts FY13 FY14 FYE FY16E FY17E 66 FY13 FY14 FYE FY16E FY17E Revenue Gross margin Adj. net profit Adj. net margin Figure 9: SOTP valuation model SOTP valuation FY recurring net profit Target FY P/E (x) Value Value per share (HK$) Core gaming business Cash Total Diluted shares in FY(m) 1,43 Sources: GF Securities (HK) Page 3

4 Figure : Financial statements Income Statement Balance Sheet Year end Dec E 16E 17E Year end Dec E 16E 17E Mobile games Cash/ST Investments Web and client games Account receivables Others Funds receivable Turnover Other Current Assets YoY Total current assets Cost of sales (22.3) (8.8) (63.7) (78.1) (92.) Property, plant &equipment Gross profit Intangible assets Available for sale investments Other income and gains Other LT Assets Selling&marketing exp. (.2) (43.1) (44.) (.9) (62.6) Total noncurrent assents Admin exp. (.9) (16.7) (19.6) (21.4) (.9) Total Assets R&D costs (9.3) (17.2) (27.7) (.2) (34.3) Operating profit Accounts and other payables Fair value loss of preferred shares (14.2) Deferred revenue Others (.) (1.3) (.7) (.) (.) Other Current Liabilities Pretax income Total current liabilities Taxation (1.3) (.2) (3.7) (.1) (6.2) Net profit Minority Interests YoY (1) 8 () 36 Shareholders' Equity Adjusted net profit Total equity YoY 9 2 (24) Total Equity & liabilities Diluted EPS (US$ cents) YoY (129) 1 () 36 BPS (US$) Adjusted diluted EPS (US$ cents) YoY (2) (6) YoY (24) Cash Flow Statement Financial Ratios Year end Dec E 16E 17E Year end Dec E 16E 17E Margins Pretax profit Gross profit margin Tax Paid.2 (1.3) (3.7) (.1) (6.2) EBITDA margin Depr/Amort Operating profit margin Change in working capital (.9) (.) 6. (2.2).2 Net profit margin Others.1 (.9) Adjusted net margin Operational cash flow Returns and profitability ROE Capex (1.) (3.8) (2.) (2.) (2.) Assets/equity (x) Assoc, MI, Invsmt. (.3) (.).1.1 ROA Investment cash flow (1.) (9.1) (13.) (2.4) (2.4) Sales/assets (x) Working capital New Capital Receivables (days) Dividend (4.9) (12.8) (37.4) (18.9) (.4) Payable (days) Others (.1) (3.8) Funds receivable (days) Financing cash flow 2.9 (16.1) (37.4) (18.9) (.4) Defered revenue ratio Per share data FX and others (.). DPS (US$ cents) Chg in Cash OCF/share (US$ cents) Beginning cash Net cash/share(us$ cents) Ending cash Page 4

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