Boyaa Interactive International Limited (0434.HK / 434 HK)

Transcription

1 Asia Pacific/China Equity Research Consumer Internet Rating NEUTRAL* [V] Price (17 Dec 13, HK$) 7.62 Target price (HK$) 8.00¹ Upside/downside (%) 5.0 Mkt cap (HK$ mn) 5,620.2 (US$ 725.0) Enterprise value (Rmb 3,181 mn) Number of shares (mn) Free float (%) week price range ADTO - 6M (US$ mn) 22.9 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Nov-13 Price (LHS) Research Analysts Dick Wei [email protected] Evan Zhou [email protected] Contribution by Daniel Chen Rebased Rel (RHS) The price relative chart measures performance against the HANG SENG INDEX which closed at on 17/12/13 On 17/12/13 the spot exchange rate was HK$7.75/US$1 Performance Over 1M 3M 12M Absolute (%) 33.9 Relative (%) 33.8 Boyaa Interactive International Limited (0434.HK / 434 HK) INITIATION Smart play on smartphone mobile game growth Initiating coverage with NEUTRAL and TP of HK$8. We initiate coverage of Boyaa Interactive with a NEUTRAL rating and a target price of HK$8. Our main valuation methodology is forward P/E. Our target price of HK$8 implies 12.5x 2015E and 17.6x 2014E diluted adjusted EPS. Leader in mobile card and board games. We view Boyaa as a leader well leveraged to the growth of smartphone/tablet mobile games in China and overseas in the next three years, especially in China smartphone card and board games with a potential market size of Rmb2.44 bn by 2015E. By 2Q13, 35% of its total revenue came from mobile games. We believe Boyaa's monetisation in the domestic market is still at an early stage, and expect ample upside from both its user base and average revenue per paying user (ARPPU). Maturity of mobile payment and further expansion into other overseas markets should also be tailwinds. Best-in-class product management and game operation. We believe product management and operational expertise are key to Boyaa's success. Supported by its anti-attack system and in-depth user data analysis, Boyaa is able to provide a high quality user experience to gamers, in our view. Investment risks: (1) Higher revenue share to game distribution platforms, higher revenue % from telecom carrier channels and increased marketing spend could drag down gross/operating margins. (2) Competition from major user-traffic owners such as Tencent, Baidu and Qihoo. (3) Execution uncertainties regarding overseas expansion. Key growth drivers: (1) Expansion of overall card and board game markets, especially in mobile, (2) ARPPU, paying ratio upside in under-penetrated markets and genres, and (3) further expansion in overseas markets. "Credit Suisse has been named as a defendant in various putative shareholder class-action lawsuits relating to Facebook Inc. s May 2012 initial public offering. Credit Suisse s practice is not to comment in research reports on pending litigations to which it is a party. Nothing in this report should be construed as an opinion on the merits or potential outcome of the lawsuits. Financial and valuation metrics Year 12/12A 12/13E 12/14E 12/15E Revenue (Rmb mn) ,215.1 EBITDA (Rmb mn) EBIT (Rmb mn) Net profit (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus charts and tables Figure 1: China card and board game market size forecast (PC + mobile) RMB Bn Source: iresearch 33.3% 53.9% 74.4% 74.9% 63.5% E 2014E 2015E 2016E 2017E card and board game market size Figure 3: China ios card and board game market share* YoY 67.8% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 2: China card and board game market breakdown 100% 90% 21.6% 14.3% 9.2% 80% 34.9% 70% 56.0% 60% 79.2% 50% 96.3% 40% 78.4% 85.7% 90.8% 30% 65.1% 20% 44.0% 10% 20.8% 0% 3.7% E 2014E 2015E 2016E 2017E Smartphone PC Source: iresearch Figure 4: Boyaa's mobile revenue exposure ramp-up 100% 90% Others 35% Boyaa 32% 80% 70% 60% 50% 99.3% 95.8% 83.1% 66.9% 54.8% 42.7% 40% GameSpring 4% Chengdu Efvision 7% ifree Studio 10% Measured by revenue in Source: iresearch KAMAGAMES 12% 30% 57.3% 45.2% 20% 33.1% 10% 16.9% 0% 0.7% 4.2% E 2014E 2015E Mobile Game Web-based game Source: Company data, Credit Suisse estimates Figure 5: China PC online game companies comps Close Mkt cap EPS P/E (x) ROE EV/EBITDA (x) FCF yield (%) Company Ticker Ccy price (US$ mn) 2013E 2014E 2015E 2013E 2014E 2015E 2014E 2013E 2014E 2015E 2013E 2014E 2015E Changyou CYOU.US USD , x 6.1x 4.0x 21.3% 4.5x 4.4x 3.0x 2% 16% 24.3% Giant Interactive GA.US USD , x 10.9x 10.0x 33.6% 9.7x 8.0x 6.9x 9% 10% 11% NetEase NTES.US USD , x 12.7x 11.0x 20.2% 8.8x 7.5x 6.4x 7% 8% 9.1% Perfect World PWRD.US USD x 10.3x 7.8x 12.8% 5.8x 3.8x 2.4x 9% 14% n.a Tencent 0700.HK HKD , x 33.1x 26.2x 31.2% 30.4x 23.7x 18.4x n.a n.a n.a Forgame 0484.HK HKD x 12.8x 9.9x 45.3% 11.2x 6.2x 4.0x n.a n.a n.a Kingsoft 3888.HK HKD , x 23.5x 19.1x 21.3% 26.6x 19.8x 15.4x n.a n.a n.a NetDragon 0777.HK HKD x 13.2x 13.7x 8.1% 2.9x 3.8x 2.2x n.a n.a n.a Average 20.5x 15.3x 12.7x 24.2% 12.5x 9.6x 7.3x 7% 12% 15% * Closing price as of 13 December 2013; Source: Company data, Bloomberg, Credit Suisse estimates Figure 6: Global mobile game companies comps Close Mkt cap EPS P/E (x) ROE EV/EBITDA (x) FCF yield(%) Company Ticker Ccy price (US$ mn) 2013E 2014E 2015E 2013E 2014E 2015E 2014E 2013E 2014E 2015E 2013E 2014E 2015E Gungho 3765 JP JPY ,819 5, , , x 12.6x 10.8x 60.6% 8.4x 9.0x 12.4x n.a n.a n.a Gamevil KQ KRW , , , x 12.1x 10.3x 15.0% 14.0x 10.1x 9.3x 4% 5% 6% Com2us KQ KRW , , , x 13.5x 10.2x 15.1% 16.7x 11.5x 8.9x n.a n.a n.a IGG 8002.HK HKD x 17.1x 12.8x 5.0% 151.8x 21.3x 17.5x n.a n.a n.a Wemade KQ KRW , , x 15.8x 11.3x 12.1% 16.7x 8.2x 6.2x -1% 4% 6% Gameloft GLFT.PA EUR x 23.2x 17.5x 17.6% 13.9x 10.1x 7.8x 2% 3% 4% Average 29.2x 15.7x 12.2x 20.9% 36.9x 11.7x 10.3x 2% 4% 5% * Closing price as of 13 December 2013; Source: Company data, Bloomberg, Credit Suisse estimates Boyaa Interactive International Limited (0434.HK / 434 HK) 2

3 Smart play on smartphone mobile game growth Leader in China mobile card and board games We see Boyaa as a leading casual game developer well leveraged to the growth of smartphone/tablet mobile games in China in the next three years. By end-2014, we expect mobile revenue to reach Rmb401 mn and contribute over 45% of Boyaa's total revenue. We estimate the overall mobile game market size in China will witness a CAGR of 82% to Rmb28.7 bn by end Boyaa focuses on the card and board games segment with long game lifecycles and is less subject to the 'hit & miss' volatility of most content providers. We view Boyaa's monetisation in the domestic market as still being at an early stage, given ample upside for ARPPU growth in the future and provincial card and chess game genre expansion. Mobile payment maturity should also help to increase Boyaa's games' conversion and ARPPU. Growth opportunity beyond domestic market Boyaa has an extensive global presence that allows it to derive revenues from players located in over 80 countries and regions by offering various language versions and, in some countries, local services and operations. Its cumulative registered players located outside of China increased from 9.1 mn (10.9% of total registered players) in 2010 to mn (36.9% of total registered players) in 1H13. Boyaa s game localisation capability is an important driver of overseas expansion. More importantly, it has built up localisation capabilities that offer in-game features specifically designed and offered for different cultures and preferences appealing to local players. Best-in-class product management, game operation Compared to other game genres, card and board games don t require that much R&D effort and creativity to develop. Content developers thus mainly compete on the following areas rather than gameplay innovation or idea creation: (1) overall user experience; (2) daily game operation expertise; (3) in-game economy balance; and (4) technology and customer services. We believe Boyaa is showing competitive strength in all those areas. Potential margin pressure from competition We expect risks to Boyaa's margin sustainability to come from: (1) growing bargaining power from large game distribution platforms; (2) increasing use of telecom carrier channels and payments with higher revenue cut ratio; and (3) potentially increasing marketing spend to acquire more users. We also expect potential competition from major traffic owners. We see Tencent as the biggest potential threat to Boyaa's market share, especially on mobile. There are also potential uncertainties in Boyaa's international expansion. Initiating coverage with NEUTRAL and HK$8 TP We initiate coverage of Boyaa with a NEUTRAL rating and a target price of HK$8. While Boyaa is benefiting from strong mobile game market growth, we believe its current valuation is fair compared to other China mobile game companies. As such we initiate with a NEUTRAL rating. For the stock to trade at a higher earnings multiple, we believe the company needs to deliver faster-than-expected mobile game revenue growth. Our main valuation methodology is forward P/E. Our target price of HK$8 implies 12.5x 15E and 17.6x 14E diluted adjusted EPS. The company had a cash position of Rmb273 mn at 2Q13. Mobile revenue forecast to reach Rmb401 mn and contribute over 45% of Boyaa's total revenue by end-14 Extensive global presence and localisation expertise should be tailwinds for Boyaa's growth in overseas markets Boyaa's competitive strength in user experience, operation expertise, and technology and services Risks: (1) Potential margin drag from value-chain dynamics.( 2) Competition from major user traffic owners. (3) Execution uncertainties in overseas expansions Boyaa Interactive International Limited (0434.HK / 434 HK) 3

4 Boyaa Interactive International Limited 0434.HK / 434 HK Price (17 Dec 13): HK$7.62, Rating:: NEUTRAL, Target Price: HK$8.00, Analyst: Dick Wei Target price scenario Scenario TP %Up/Dwn Assumptions Upside Mobile game to grow at CAGR of 85% 13E-15E Central Case Mobile game to grow at CAGR of 76.4% 13E-15E Downside 5.60 (26.51) Mobile game to grow at CAGR of 60% 13E-15E Income statement (Rmb mn) 12/12A 12/13E 12/14E 12/15E Sales revenue ,215 Cost of goods sold SG&A Other operating exp./(inc.) (7.6) (13.2) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) (2.6) (3.4) Non-operating inc./(exp.) (1.3) (0.5) (0.5) (0.5) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (Rmb mn) 12/12A 12/13E 12/14E 12/15E EBIT Net interest (9.1) (10.8) Tax paid (44.7) (27.9) (52.7) (73.7) Working capital 32.8 (72.3) Other cash & non-cash items Operating cash flow Capex (4.4) (3.5) (4.0) (4.0) Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) (41.9) (3.6) Investing cash flow (46.3) (7.1) (4.0) (4.0) Equity raised Dividends paid Net borrowings 5.0 Other financing cash flow 8.0 (0.0) Financing cash flow Total cash flow Adjustments (0.000) Net change in cash Balance sheet (Rmb mn) 12/12A 12/13E 12/14E 12/15E Cash & cash equivalents 275 1,221 1,531 1,975 Current receivables Inventories Other current assets Current assets 445 1,515 1,849 2,332 Property, plant & equip Investments Intangibles Other non-current assets Total assets 475 1,549 1,881 2,362 Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab Total liabilities Shareholders' equity 302 1,319 1,597 1,984 Minority interests Total liabilities & equity 475 1,549 1,881 2,362 Key earnings drivers 12/12A 12/13E 12/14E 12/15E Mobile game 87, , , ,687 revenue(rmb Mn) Per share data 12/12A 12/13E 12/14E 12/15E Shares (wtd avg.) (mn) EPS (Credit Suisse) (Rmb) DPS (Rmb) BVPS (Rmb) Operating CFPS (Rmb) Key ratios and 12/12A 12/13E 12/14E 12/15E valuation Growth(%) Sales revenue EBIT 64.6 (9.1) Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) (91) (93) (96) (100) Net debt/ebitda (x) (1.38) (6.69) (5.03) (4.36) Interest cover (x) (115) (133) Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple Source: IBES 12MF P/B multiple Boyaa Interactive International Limited (0434.HK / 434 HK) 4

5 Leader in China mobile card and board games We see Boyaa as a leading casual game developer well leveraged to the growth of smartphone/tablet mobile games in China in the next three years. By end-2014, we expect mobile revenue to reach Rmb401 mn and contribute over 45% of Boyaa's total revenue. In our view, although the market has already ridden the wave of mobile games since April 2013, the mobile game theme will continue to be a key focus over the next two years for investors looking for tangible exposure to China's mobile Internet monetisation. We estimate the overall mobile game market size in China will witness a CAGR of 82% to Rmb28.7 bn by end Mobile game theme should continue to be a key focus over the next two years for investors looking for tangible exposure to China's mobile Internet monetisation Figure 7: China Online Game market forecast Mobile to reach Rmb29 bn by 15E E 2014E 2015E MMO games MMOG gamers (mn) Online game user penetration 16.6% 16.6% 16.6% 16.8% 16.8% 16.2% 16.2% 16.2% Average monthly ARPU (RMB) Market size (Rmb mn) 15, , , , , , , ,714.3 MMG market size (US$ mn) 2, , , , , , , ,841.8 YoY growth 75% 37% 0% 29% 20% 8% 7% 7% Advanced casual games ACG players (mn) ACG players penetration 22.8% 23.0% 24.5% 24.8% 25.5% 26.0% 26.8% 27.0% APRU per month (Rmb) Market size (Rmb mn) 3, , , , , , , ,655.5 ACG market size (US$ mn) , , , , , ,923.0 YoY Growth 155% 59% 33% 63% 33% 18% 15% 14% Webgames Webgame market size (Rmb mn) , , , , , , ,765.9 Webgame market size (US$ mn) , , , ,190.4 YoY growth 204% 193% 38% 49% 23% 20% 15% Mobile games Mobile market size (Rmb mn) 1, , , , ,738.5 Mobile market size (US$ mn) , , ,572.7 YoY growth 180% 130% 75% 50% Total game mkt (Rmb mn) 19,405 28,046 32,370 44,550 58,460 71,641 86, ,874 Total game mkt (US$ mn) 2,824 4,108 4,814 6,938 9,272 11,399 13,836 16,528 YoY growth 92% 45% 17% 44% 34% 23% 21% 19% Source: IDC, Credit Suisse estimates Supported by increasing penetration of smartphones, the mobile game market in China has experienced exponential growth in Leading mobile games in China, such as I am MT and Fishing Joy 2, have surpassed a monthly gross revenue of Rmb80 mn. According to Guangzhou Yin Han, its key title Space Hunter will achieve global monthly gross revenue of over Rmb100 mn in October Boyaa Interactive International Limited (0434.HK / 434 HK) 5

6 Figure 8: Leading smartphone mobile games in china Title Chinese title Genre Developer Publisher Gross mthly rev (Rmb mn) Timi Run Everyday 天 天 酷 跑 ACG Tencent Tencent 150 Quan Min Ying Xiong 全 民 英 雄 Card Sixjoy Tencent 120 Tiantian Runner 天 天 酷 跑 ACG Tencent Tencent 100 Space Hunter 时 空 猎 人 ACT 银 汉 科 技 触 控 Punchbox 80 Trump the landlord 欢 乐 斗 地 主 ACG Tencent Tencent 80 Fishing Joy 2 捕 鱼 达 人 2 ACG 触 控 Punchbox 触 控 Punchbox 75 I'm MT 我 叫 MT Card 乐 动 卓 越 Locojoy 乐 动 卓 越 Locojoy 70 The Legend of King 王 者 之 剑 ACT 蓝 港 Linekong 蓝 港 Linekong 50 Timi match everyday 天 天 爱 消 除 ACG Tencent Tencent 40 Return of the Condor Heroes 神 雕 侠 侣 RPG Perfect World Perfect World 30 Million Arthur 百 万 亚 瑟 王 Card Square Enix Shanda Games 30 Da Zhang Men 大 掌 门 Card 玩 蟹 科 技 蜂 巢 游 戏 27 Meng Jiang Hu 萌 江 湖 Card 游 族 Youzu 游 族 Youzu 25 QQ Yujian QQ 御 剑 RPG Tencent Tencent/Feiliu 20 Dream One Piece 梦 想 海 贼 王 RPG Youai Youai 20 Wu Xia Q Zhuan 武 侠 Q 传 RPG HuoGu CMGE/Kunlun 20 The World 世 界 OL RPG 广 州 谷 得 广 州 谷 得 18 Wang Xian 忘 仙 RPG 神 奇 时 代 神 奇 时 代 / 昆 仑 Kunlun 17 Plant Vs Zombie 植 物 大 战 僵 尸 ACG Popcap Tencent 16 Mo Ka Huan Xiang 魔 卡 幻 想 Card ifree Vector(in Japan) 15 Sanguo Now 三 国 来 了 Card RedAtoms Tencent 15 Dragon Force 龙 之 力 量 RPG Digital Sky Digital Sky 14 Junwang 2 君 王 2 RPG Morefun Morefun 13 Ying Xiong Zhan Hun 英 雄 战 魂 ACT EGLS 昆 仑 Kunlun/Glu 12.5 Shen Xian Dao 神 仙 道 RPG 心 动 游 戏 心 动 游 戏 12 Little Empire 小 小 帝 国 RTS Camel Game Camel Game 10.2 Source: Pocketbus. Gamelook, DoNews, CCidnet, Credit Suisse estimate. * ACG= Advanced Casual Game, RPG=Role Playing Game; RTS=Real-time Strategy. Among all mobile game genres, Boyaa focuses on the card and board games segment, which enjoys long game lifecycles and is less subject to the normal 'hit & miss' volatility of most content providers. According to iresearch, the China card and board game market will post a CAGR of 64% to Rmb3.1 bn by 2015E. Boyaa focuses on the card and board games segment, less subject to the normal 'hit & miss' volatility Figure 9: China total card and board game market size forecast (PC + mobile) RMB Bn % 67.8% 74.4% 53.9% 63.5% 33.3% E 2014E 2015E 2016E 2017E 80% 70% 60% 50% 40% 30% 20% 10% 0% card and board game market size YoY Source: iresearch Boyaa Interactive International Limited (0434.HK / 434 HK) 6

7 Figure 10: China card and board game market breakdown 100% 90% 21.6% 14.3% 9.2% 80% 34.9% 70% 56.0% 60% 79.2% 50% 96.3% 40% 78.4% 85.7% 90.8% 30% 65.1% 20% 44.0% 10% 20.8% 0% 3.7% E 2014E 2015E 2016E 2017E Smartphone PC Source: iresearch Figure 11: China smartphone card and board game market size forecast RMB Bn % % 200% 158.3% 110.6% % 100% % 78.8% % % E 2014E 2015E 2016E 2017E Smartphone card and board game market size YoY Source: iresearch According to iresearch, the mobile segment of the online card and board game market reached approximately Rmb138 mn in 2012 and is expected to grow exponentially to approximately Rmb7.8 bn in 2017E, representing a CAGR of 123.9% over the same period. The smart mobile segment accounted for 3.7% and 20.8% of the online card and board game market in 2011 and 2012, respectively, and is expected to further expand by ~78% by 2015E to ~Rmb2.44 bn, which is consistent with the trend of players shifting from playing games on PCs to smart mobile devices. Figure 12: China top ios card and board game* Game Developer 1 Texas Hold em Boyaa 2 Texas Poker KAMAGAMES 3 Mo Ka Huan Xiang ( 魔 卡 幻 想 ) ifree 4 Texas Hold em HD Boyaa 5 Zha Jin Hua OL( 欢 乐 联 网 炸 金 花 ) Chengdu Efvision Info-Tech * Based on revenue in Source: iresearch. Boyaa Interactive International Limited (0434.HK / 434 HK) 7

8 Within the China mobile card and board game market, in 2012, Boyaa ranked No. 1 among all game developers that offer ios mobile card and board games in China, with an approximately 32% market share in terms of revenue generated from ios mobile card and board games in the PRC. Boyaa also ranked No. 1 in terms of number of downloads among all ios mobile card and board game developers in the PRC in 2012, accounting for approximately 22.3% of all ios mobile card and board game downloads. Boyaa s success in the PRC market is mainly attributable to the quality and quantity of its card and board games and early-mover advantage. By the end of 2012, Boyaa offered 13 mobile card and board games in the PRC, and ranked No. 4 in terms of number of ios mobile card and board games offered in the PRC in 2012, according to iresearch. Boyaa was also the No. 1 PRC-based corporate developer as measured by the number of ios mobile card and board games offered in the PRC in Boyaa s success in the PRC market is mainly attributable to the quality and quantity of its games and early-mover advantage Boyaa s Texas Hold em games (offered in two versions: standard and high definition) were ranked No. 1 and No. 4, respectively, among all ios mobile card and board games in terms of revenue generated in the PRC in Boyaa s Fight the Landlord ( 斗 地 主 ) and Texas Hold em were also among the top five most downloaded games on ios in the PRC in Figure 13: China ios mobile card and board game market breakdown* Others 35% Boyaa 32% GameSpring 4% Chengdu Efvision 7% * Measured by revenue in Source: iresearch ifree Studio 10% KAMAGAMES 12% Monetisation in domestic market still at early stage Boyaa's second most popular game, Fight the Landlord ( 斗 地 主 ), is based on one of the most popular card games in China. Its revenue contribution increased from Rmb1.3 mn (0.8% of total revenue) to Rmb21.6 mn in 1H13 (7% of total revenue). We believe the exponential growth of this game is mainly driven by total user growth; its monthly active users (MAUs) increased from 0.17 mn in 2010 to 8.5 mn in 1H13. On the ARPPU side, given the monthly ARPPU of Boyaa's mobile game is only Rmb32.1 in 1H13, we expect ample upside for growth in the future. Similar to the case of Fight the Landlord, many mobile games under provincial card and chess game genres in China are still in development. We expect these game titles to support Boyaa's growth in the Chinese domestic market in the coming two years. Mobile payment maturity should help conversion and ARPU Maturity of mobile payment channels: Although greatly improved over the past two years, the overall mobile payment process is still not that satisfactory. In most cases, customers need to enter and confirm through at least four to five mobile web pages to complete the entire process, thus losing a very high percentage of customers along the Diversification in genres and titles should decrease revenue concentration and provide more options to Boyaa's gamers Boyaa Interactive International Limited (0434.HK / 434 HK) 8

9 way. In recent months in 2013, we have seen good progress in leading mobile payment solution providers such as Alipay and Tenpay simplifying their payment procedures for login users. Adoption of telecom carrier channels: Telecom carriers are also embracing the rising demand for mobile payment by opening up monthly bill charging with key content developers. Gamers can pay easily for games through SMS on their monthly phone bill. To prevent the content provider (CP) from manipulating use of this easy service, telecom carriers approve qualified CP strictly, and apply payment limits per transaction to prevent over-billing. Therefore, this small amount, easy-to-use payment method best fits highquality casual game developers. In order to enhance monetisation, Boyaa has been improving payment convenience and flexibility by utilising emerging technology and payment methods, such as enabling payment through SMS provided by telecom carriers, and streamlining the payment process to increase sales. We expect such attempts to help the company further increase ARPU and the conversion rate of paying users. Boyaa Interactive International Limited (0434.HK / 434 HK) 9

10 Growth opportunity beyond the domestic Chinese market Back in 2009, Boyaa had already expanded into the global market through web-based social card and board games on major global social networks. It has an extensive global presence that allows it to derive revenues from players located in over 80 countries and regions based on IP addresses by offering various language versions of its games, such as simplified and traditional Chinese (targeting China, Hong Kong, Macau, and Taiwan and overseas Chinese communities), Thai, Indonesian, German, French, Portuguese, Turkish, Vietnamese, Arabic and English. Boyaa s cumulative registered players located outside of China increased from 9.1 mn (10.9% of total registered players) in 2010 to mn (36.9% of total registered players) in 1H13. Figure 14: Boyaa revenue breakdown by language version of games (1H13) Turkish 1.1% Portuguese 1.0% French 1.8% German 4.0% Indonesian 3.9% Vietnamese 1.2% Arabic 1.9% English 0.5% Others 2.4% Simplified Chinese 30.8% Thai 27.5% Source: Company data. Traditional Chinese 23.9% We list some of Boyaa's key markets outside mainland China: Hong Kong Hong Kong s mobile card and board game market is mature and competitive. Major developers in this market in Hong Kong are from the PRC, Korea and Taiwan. The total market size of mobile card and board games in Hong Kong by revenue was approximately Rmb60 mn in 2012 and is expected to reach Rmb650 mn in 2017, representing a CAGR of 61.0% from 2012 to 2017, according to iresearch. Boyaa currently offers 13 ios mobile card and board games in Hong Kong and was the No. 1 game developer in terms of revenue in 2012 with an approximately 25% market share, according to iresearch. It was also the No. 1 ios mobile card and board game developer in terms of number of downloads in Hong Kong in 2012, accounting for 21.8% of all ios mobile card and board game downloads in Hong Kong in Among all ios mobile card and board games in Hong Kong in 2012, Boyaa s Fight the Landlord ranked No.1 in terms of revenue generated and No. 4 in terms of number of downloads. The standard version of Boyaa s Texas Hold em ranked No. 4 and No. 8 by the same measure, respectively. In addition, Boyaa has the largest game portfolio among the top 20 ios mobile card and board games by revenue in Hong Kong in Boyaa Interactive International Limited (0434.HK / 434 HK) 10

11 Taiwan Taiwan historically imposed strict limitations on game companies from the PRC, such as prohibiting them from independently operating online games in the country. Over the past several years, the Taiwanese government has relaxed relevant regulations and policies, which provided new opportunities for game companies both in the PRC and Taiwan. Taiwan s Internet related industries are relatively mature and competitive. Domestic game developers in Taiwan possess strong research and development capability and have achieved leading market positions. The market size of Taiwan s mobile card and board games reached about Rmb60 mn in 2012, up 317.6% YoY. It is expected to further increase to approximately Rmb1,730 mn in 2017, representing a CAGR of 95.9% from 2012 to 2017, according to iresearch. iresearch data also show that Boyaa ranked No. 2 in ios mobile card and board games in Taiwan, with a ~22% market share by revenue in Except for the largest mobile card and board game developer with a ~24% market share by revenue in 2012, no other card and board game developer s market share exceeded 5%. Boyaa currently offers 12 ios mobile card and board games in Taiwan and is ranked fourth by the number of ios mobile card and board games offered in Taiwan in According to iresearch, Boyaa s Texas Hold em and Fight the Landlord ranked No. 1 and No.3 in terms of ios mobile card and board games by revenue in Taiwan in 2012, respectively. Thailand Currently, over 90% of the total online game market by revenue in Thailand is generated from overseas developers. Domestic game developers in Thailand are still at an early stage and normally operate games licensed from overseas developers. According to iresearch, the total market size of mobile card and board games by revenue in Thailand was approximately Rmb70 mn in 2012 and is expected to rise to Rmb820 mn in 2017, representing a CAGR of 63.6% from 2012 to App stores and Facebook are the two major distribution and promotion platforms for foreign game developers to tap into the Thailand market. According to iresearch, Thailand s mobile game market is currently at an early stage of development. The ios mobile card and board game markets in Thailand are relatively concentrated, with the top three game developers collectively accounting for 60% of market share by revenue in Among all the mobile services, mobile games are the third most popular mobile application in Thailand. Given the strong market growth, early movers are positioned to reinforce their leading positions in the long run in the Thai mobile game market. Boyaa was the market leader with an approximately 43% market share by revenue in the ios mobile card and board game market in Thailand in The No. 2 market leader had a market share of approximately 10% in Based on the number of ios mobile card and board games available in the Thai market, Boyaa was the No. 3 game developer in Thailand in Boyaa s Texas Hold em offered in two versions (standard and high definition) ranked No. 1 and No. 2, respectively, in terms of revenue generated from ios mobile card and board games in Thailand in The total revenue generated by these two versions of Texas Hold em was approximately four times that of the No. 3 ios mobile card and board game developer in Thailand, according to iresearch. Furthermore, these two versions of Texas Hold em also ranked No. 1 and No. 3, respectively, among all ios mobile card and board games in terms of total number of downloads in Thailand in Boyaa Interactive International Limited (0434.HK / 434 HK) 11

12 Figure 15: Boyaa s presence in Apple app store (card and mobile game category) Revenue Total downloads Number of games offered China No.1 (32%)* No.1 (22%) No.4 Hong Kong No.1 (25%) No.1 (22%) No.4 Taiwan No.2 (22%) No.3 (10%) No.4 Thailand No.1 (43%) No.1 (20%) No.3 * Market share shown in brackets. Source: iresearch New country expansion in key focused regions Boyaa s game localisation capability is an important driver of overseas expansion. Most of Boyaa s online games are available in multi-languages in order to attract players from various countries and regions. For example, Texas Hold em, Boyaa s most popular game, currently has 19 language versions, including simplified and traditional Chinese, English, Thai, Indonesian, German, French and Vietnamese; Fight the Landlord ( 斗 地 主 ) has three language versions, including simplified Chinese, traditional Chinese and Thai; and Ant Wars ( 虫 虫 特 攻 队 ) has five language versions, including simplified and traditional Chinese, Thai, Indonesian and Arabic. More importantly, Boyaa has built up localisation capabilities that offer in-game features specifically designed and offered for different cultures and preferences, appealing to local players. For example, Boyaa launched in-game activities during local festivals to stimulate players and promote virtual items, such as the Texas Hold em tournament in April 2013 around the time of the Songkran holiday in Thailand. Boyaa has also developed games that target a specific country or region. It launched a card game, King & Slave, in November 2012 in the Thai language which targets players in the country. It was developed on the basis of a traditional card game widely popular in Thailand. Average daily active users (DAUs) and MAUs of King & Slave increased from 16,200 and 90,200 respectively for the two months ended 31 December 2012 to 62,200 and 283,700 respectively in 1H13. These localised game features and new games significantly improve player experience and help foster awareness of Boyaa games' artistic and cultural aspects, which helps the company retain and expand its player base in those countries and regions. Boyaa s game localisation capability is an important driver of overseas expansion. Boyaa has built up localisation capabilities that offer in-game features specifically designed for different cultures, and preferences appealing to local players For select overseas markets, such as Vietnam, Indonesia, and other countries where the smartphone penetration rate is relatively low and web-based online games still dominate the local online game market, Boyaa plans to focus on expanding the local player base by further strengthening game localisation and establishing regional marketing and game distribution platforms through cooperative relationships with local game portals and other local distributors. Boyaa Interactive International Limited (0434.HK / 434 HK) 12

13 Best-in-class product management and game operation Barriers to entry: Easy to enter, but hard to become a master Compared to other game genres, card and board games don t require that much R&D effort and creativity to develop. In Boyaa, it usually only takes about two weeks for developers to complete the main coding of a specific card and board gameplay. In the card and board games market, content developers mainly compete on the following areas rather than gameplay innovation or idea creation. User experience To help players familiarise themselves with Boyaa's games, the company provides tutorials for new players for each of its games. While playing the games, players may raise questions or concerns at any time through the in-game customer service system. In order to improve player experience, Boyaa offers in-game social functions, including online chatting and friend invitations that enable its players to communicate with each other, publicly or privately, on a real-time basis. To further increase player interaction, Boyaa provides in-game gift-giving functions that allow players to send limited types of virtual items as gifts, such as virtual flowers and ornaments, to one another. Boyaa encourages players to invite friends and family to join its games by granting them bonus virtual tokens and other virtual items for successful referrals. Boyaa's games offered through social networks all incorporate the players connections and friends. Boyaa believes such social functions and features enhance its players loyalty by building connections among players and fostering an engaging player community in its games. Boyaa's games also provide a one-click service to enable and encourage players to share their game experience and results with family and friends on social media, such as Facebook and Sina Weibo. Management believes that these efforts make its games more interactive and significantly enhance player stickiness. Given the engaging nature of Boyaa's games, the small storage requirements for downloading, the short time needed to play each game and the easy access and cross-platform game experience Boyaa offers, players tend to play its games during any leisure time. On average, it takes only minutes to play a session of most of Boyaa's games, which makes its games ideal for relaxation during work breaks, in transit and during other fragmented times throughout the day. In June 2013, the daily average game time per player was 1.2 hours in Texas Hold em, 1.1 hours in the four-player version of Fight the Landlord, 0.9 hours in the three-player version of Fight the Landlord ( 鬥 地 主 ), 1.0 hour in Big Two ( 鋤 大 地 ) and 1.1 hours in King & Slave. Daily game operation Updates. In order to continuously improve games and player experience, Boyaa frequently releases upgrades for its games. Currently, its web-based games are upgraded approximately on a weekly basis, and mobile games are upgraded monthly. Boyaa upgrades its games for fixing bugs or programming or technical issues, installing new ingame features and rolling out updates for newly released mobile devices or updated operating systems. Mobile players are usually able to access the upgraded version by downloading the upgrade package once. Resource management. As a result of the different programming specifications and configurations adopted by various desktop computer and mobile operating systems, game developers are typically required to use separate scripting languages to develop game programmes for each operating system. For game developers who expect to offer crossplatform games, this technical barrier usually presents significant costs in terms of technology, time and capital resources. Content developers mainly compete on other things rather than gameplay innovation or idea creation in card and board games. Boyaa Interactive International Limited (0434.HK / 434 HK) 13

14 To solve this problem, Boyaa utilises the Boyaa Building Engine, an integrated set of source codes it has developed for cross-platform game development. The engine offers a cost-effective solution for this issue; it integrates application programming interfaces for various scripting languages, allowing developers to develop game programmes for various operating systems by inputting only one uniformed scripting language. In addition, the Boyaa Building Engine uses memory management solutions to improve systematic stability. Boyaa also uses two advanced application programming interfaces to support graphics systems which allow it to create a high performance environment for graphics processing. Leveraging on the Boyaa Building Engine, the company is able to develop cross-platform games in an efficient and cost-effective manner, while ensuring consistent quality and performance of the games that are developed. It also significantly reduces reliance on any particular development personnel and the cost of on-going maintenance and operation. Effective event marketing, promotion campaigns with channels. Boyaa has implemented various marketing and promotional measures to market and promote its online games. Since 2010, Boyaa has started to promote games to game players through social networking websites and online application stores, as well as web-based game portals and mobile game portals. Due to the different distribution platforms Boyaa utilised for its web-based and mobile games, it designed different marketing activities tailored for each type of game. For example, for web-based games, Boyaa strategically leveraged the existing interactions among users of social networking websites to allow players to invite their friends or send in-game gifts to their friends in order to attract new or existing players. For mobile games, Boyaa sends push notifications to players to remind them of new version updates and provides bonus tokens for downloading and installing the new version of games, which in turn increases the number of downloads of games and raises their ranking in mobile application stores, attracting potential new players. In China, Boyaa primarily utilises game portals and application stores operated by some of China s social networking services, Internet service platforms and game platform operators, such as Sina Weibo, Tencent QQ, 51.com, Renren.com, Baidu.com, 360.cn and GoMarket, to promote its games. In overseas markets, Boyaa primarily markets and promotes its web-based games through Facebook and mobile games through Apple Inc. s app store and Google Play. It also attend trade fairs, such as the Global Mobile Internet Conference in Beijing, China, the Thailand Game Show and Social Games Expo in Thailand, and the Indonesia Game Show in Indonesia, to enhance brand recognition in both China and its overseas markets. In-game economy balance In order to regulate the game environment and prevent certain unauthorised acts by third parties or inappropriate players or third-party behaviour which could have an adverse impact on its games, Boyaa has implemented various measures, including adopting comprehensive terms and conditions for game players. It has detected violations of its game policies by players in the past, including unauthorised transfers of virtual tokens, collusion and intentional losses, use of cheating programmes and account theft. Once an unauthorised or inappropriate activity is detected, Boyaa takes measures against the players involved based on the nature and magnitude of each violation, such as forfeiting the awarded virtual tokens, suspending the relevant player account for a certain period or terminating the account permanently. During the Track Record Period, Boyaa recorded account terminations of 91,200, 106,667 and 23,750 in 2011 and 2012 and 1H13, respectively. The table below sets forth the number of major violations Boyaa recorded. Figure 16: Number of major violations recorded by Boyaa H13 Use of cheating programmes 74,784 84,267 19,238 Account theft 8,208 9,600 1,900 Abnormal purchases 1,824 5, Unauthorised transfer of virtual tokens 3,648 3, Other inappropriate or harassing behaviours 2,736 4, Total 91, ,667 23,750 Source: Company data Boyaa Interactive International Limited (0434.HK / 434 HK) 14

15 Technology and customer services (1) Back-end tech In addition to its proprietary Boyaa Building Engine, the other components of Boyaa s technology infrastructure have also significantly contributed to the success of its business operations. Large server infrastructure and network-based caches Boyaa's diversified online game portfolio and a large global player base are supported by a stable and powerful network infrastructure. All of Boyaa's card and board games are synchronous games featuring real-time interaction, which require Boyaa's server network to respond promptly with low latency. To meet these needs, the company's team of experts designed a cloud-based network infrastructure with centralised server systems to maximise the efficiency of its network infrastructure. As at the Latest Practicable Date, Boyaa owned and leased a total of over 360 servers hosted in 15 locations in China and certain other countries and regions, 136 of which were located in four centralised data centres in Singapore, Washington D.C. and Seattle in the United States and Amsterdam in the Netherlands. In addition, Boyaa has implemented network-based caches to quickly respond to massive data access triggered by a large number of concurrent players, minimising the access to its server database. As such, Boyaa's large capacity server centres ensure data synchronisation while the other local servers cache the Internet content in order to speed up access to data and reduce demand on local bandwidth. Data centre service The servers used in Boyaa's game operation are hosted in data centres in different geographic regions in China. The data centres in Boyaa's network are owned and maintained by data centre service providers. Boyaa has typically entered into leasing and hosting service agreements with data centre service providers that are renewable annually. The data centre service providers are responsible for providing server hosting space with stable power supply, IP addresses, broadband Internet connection facilities and firewall monitoring services that can meet Boyaa's requirements. The data centre service providers are also responsible for technical consulting and support services on a 24/7 basis. Boyaa is obliged to pay service fees subject to the terms of the leasing and hosting service agreements. Anti-attack system The stability and safety of Boyaa's network infrastructure is critical to its reputation and online game operations. The company has experienced various hacking attacks during the ordinary course of business. For example, during the years ended 31 December 2010, 2011 and 2012 and 1H13, Boyaa's system recorded nil, 9, 65 and 93 distributed denial-ofservice attacks. None of these attacks caused any material interruption to Boyaa's network infrastructure or loss or corruption of data during the Track Record Period. Furthermore, Boyaa has adopted comprehensive measures to enhance the safety of its players accounts. Its system maintains logs of player actions, including but not limited to rounds of games played, balance of virtual tokens, each addition or use of virtual tokens for each player, to ensure the accuracy of such information. Boyaa assigns a separate system for the storage of information relating to virtual tokens, which is complemented by the real-time backup and off-site disaster-tolerant back-up programmes. Boyaa has provided account protection functions in its Texas Hold em game and is in the process of implementing account protection measures for its other games. It asks players to set a private security code, subject to their preference, for each log-in or for a log-in with a different IP address from the previous time. For players who have purchased in-game memberships, Boyaa also offers a virtual safety box function for the players to store their virtual tokens separately. The safety box will be locked for one day if a wrong security code is entered three times. Lastly, Boyaa's customer service staff assist its players to investigate any claims relating to account theft or unauthorised access. Boyaa Interactive International Limited (0434.HK / 434 HK) 15

16 (2) In-depth data analysis to better understand user characteristics Boyaa uses data analytics to collect and analyse data that enable it to enhance games and improve player experience. The company has a dedicated seven-member team responsible for data analysis. Leveraging its cloud-based infrastructure and machine learning technology, Boyaa collects and analyses a wide array of data from its game players on a daily basis in a centralised, web-based data management system which can be accessed by all the relevant game development and operation teams. Through evaluation and analysis of such data, Boyaa is able to accurately understand the characteristics and lifespan of its games, which enables it to work closely with its in-house game developers to evaluate and enhance their features and extend their lifespan. Boyaa closely tracks and analyses players in-game performance and behaviour, such as preferred time of gameplay, number of rounds of games played, in-game activity levels, progress of skill levels, frequency of using specific in-game functions, social connections, reactions to localised game settings and newly-introduced activities, receptiveness to promotional activities, preference for specific types of virtual items, buying patterns and histories and the effectiveness of its own marketing activities. Through these efforts, the company is able to understand its game players in-game behaviour patterns, which helps it to enhance the design of game features through adjusting the difficulty levels of in-game missions and challenges and optimising the minimum amount of virtual tokens required to play specific games. Boyaa's data analytics also enable it to anticipate and address players reactions to its new game features and virtual item promotions, optimise its marketing efforts and effectiveness, attract more registered players to become paying players and drive sales of virtual tokens and other virtual items. (3) Value of user feedback Boyaa currently maintains a dedicated customer service team with 47 service representatives, who are able to provide services in 17 languages in a timely manner. Players may submit queries, feedback or complaints by sending messages via Boyaa's in-game customer service system at any time. Players of games offered in simplified and traditional Chinese may also call Boyaa's service hotline, which operates on a 24/7 basis. Boyaa currently provides customer services eight hours a day through its in-game service system for players of games in languages other than simplified and traditional Chinese and Thai. Upon receipt of complaints or inquiries from Boyaa's players, its customer service team conducts testing and responds promptly. The firm's customer service representatives provide detailed explanations and instructions to guide players on solving problems that relate to a game's functions and features. Complaints relating to in-game payments or awards, programming errors or technical issues or claims for damages are reported to the managers of the relevant games, who are responsible for resolving them. Under Boyaa's complaint processing policy, complaints relating to in-game payments or awards are required to be resolved within one to three business days; material complaints, such as those relating to programming errors or technical issues or claims for damages, are required to be resolved within three to seven business days. As at the Latest Practicable Date, Boyaa had not received any material complaints from its players. Boyaa Interactive International Limited (0434.HK / 434 HK) 16

17 Potential margin pressure from competition Margin sustainability Boyaa's game distribution channel has been fairly diversified, both on PC and mobile, domestic and overseas. Because of its good game and service quality, most channels will offer good terms to Boyaa to operate on its platform, or even go exclusive with Boyaa on its Texas Hold'em and Fight the Landlord game series. Figure 17: Boyaa's main distribution channels H13 Channel % of total revenue Channel % of total revenue 1 Facebook 22.0% Facebook 18.2% 2 Apple app store 10.3% Apple app store 16.2% 3 Sina Weibo 7.6% Sina Weibo 7.0% 4 Tencent QQ 5.9% Tencent QQ 5.4% 5 51.com 2.3% Renren 2.4% Source: Company data However, game distribution channels' bargaining power is growing these days, as industry consolidation continues and major Internet players enter this segment. Pressure for more game co-operation with channels, and potentially higher revenue share ratios for channels, is increasing gradually. Secondly, to further expand user reach and increase its payment success rate, Boyaa has been increasing the use of telecom carrier channels and SMS payments. Telecom carriers usually charge 30% of total gross revenue as payment channel fee, and ask for further share/ad dollars if games are distributed through their channels. In our view, the volume mix shift towards telecom carriers may drag down gross margin. On the other hand, the company has been increasing the use of prepaid cards in overseas distribution, which enjoy higher gross margins compared to other channels. The expansion of prepaid cards in the mix should incrementally help mitigate gross margin pressure. Pressure for more game cooperation with channels, and potentially higher revenue share ratios for channels, is increasing gradually. Figure 18: Cost of revenue as a percentage of revenue 5% 40% Figure 19: Operating expenses as percentage of revenue 25% 4% 30% 20% 3% 2% 20% 15% 10% 1% 10% 5% 0% 0% H13 Employee benefit(lhs) Business tax etc(lhs) Server rental(lhs) Other expenses(lhs) Commission charges(rhs) 0% -5% H13 S&M Administrative Others Source: Company data Source: Company data Boyaa Interactive International Limited (0434.HK / 434 HK) 17

18 Lastly, as competition increases, Boyaa may also need to increase its marketing spend, to acquire more users and build a brand name over the longer run, in our view. More use of OEM and telecom pre-installations may also push up sales and marketing spend further. Figure 20: Gross/operating/net margin trend of Boyaa 70.0% Boyaa may also need to increase its marketing spend, to acquire more users and build a brand name over the longer run 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% H13 gross margin operating margin net margin Source: Company data. Competition from major traffic owners Most of Boyaa's games are based on commonly-played classic card and board games which are not original creations that require innovation and significant R&D investment. In the international market, Boyaa mainly competes with game developers and operators such as Zynga Inc., Playtech Ltd. (which operates Ipoker.com), IGG Inc. (which operates Igg.com) and SNSplus, Inc. (which operates Snsplus.com), and in China, with developers and operators such as Ourgame.com and JJworld. Besides standalone game developers, Boyaa's current and potential competitors also include major Internet service platforms that also offer online games, such as Tencent, Baidu and Qihoo 360. They have large user traffic and high user stickiness generated by their comprehensive services, which they may be able to leverage to launch and support the success of their online game operations. Major Internet companies also enjoy large capital positions and marketing resources, offering them an advantage in developing and operating or acquiring games, conducting marketing and promotional activities and hiring talent. Boyaa may have a less recognised brand name among its target players compared to some major Internet companies. This may put it at a competitive disadvantage in attracting players when competing with other game operators that have greater brand recognition. Of all the major Chinese Internet giants, we see Tencent as the biggest potential threat to Boyaa's market share, especially on mobile. Tencent already has a large presence in the PC-based card and board game market in China, helped by its QQ and QQ Games franchise. According to Analysys, Tencent had over a 50% market share in China's card and board game market in We expect Tencent's branding power and wide user base to continue to be its advantages on a mobile platform. The newly launched WeChat game platform may pose a further threat to Boyaa's market share. On 15 October 2013, Tencent launched its first card and board game on the WeChat platform (Fight the landlord). Although no solid revenue generation has been shown given its short operating time, we view it to be a threat to Boyaa, given the strong performance of previous WeChat games. We see Tencent as the biggest potential threat to Boyaa's market share, especially on mobile Boyaa Interactive International Limited (0434.HK / 434 HK) 18

19 Potential uncertainties in international expansion Boyaa has achieved solid and rapid growth in overseas markets in the past. In 3Q13, its games have reached players in over 100 countries and regions and generated revenues from paying players in over 80 countries and regions. Continuing this international expansion is an important component of Boyaa's growth strategy. However, expanding its global presence may subject it to significant risks, including, but not limited to, risk relating to: (1) identifying appropriate international markets; (2) recruiting and retaining talented local personnel; (3) providing and customising games that cater to local players interests and preferences; (4) competing with local online game developers and operators with established market shares and a better understanding of local players needs and preferences; (5) identifying and negotiating with local business partners, including those involved in game distribution, payment channel operations and other businesses; (6) encountering protectionist laws and business practices that favour local businesses; and (7) encountering country-specific economic downturns and exchange rate fluctuations. If Boyaa is unable to manage the risks and costs of international expansion effectively, its growth rate and prospects may be adversely affected. Boyaa Interactive International Limited (0434.HK / 434 HK) 19

20 Initiate with NEUTRAL and target price of HK$8 We initiate coverage of Boyaa with a NEUTRAL rating and a target price of HK$8. While Boyaa is benefiting from strong mobile game market growth, we believe its current valuation is fair compared to other Chinese mobile game companies. As such we initiate with NEUTRAL rating. For the stock to trade at a higher earnings multiple, we believe the company needs to deliver faster-than-expected mobile game revenue growth. Boyaa was listed in Hong Kong on 12 November with an offering price of HK$5.4; on the debut day its share price increased by 14% to HK$6.1. On 17 December 2013, Boyaa's share price reached HK$7.6, up by 40.7% from the offering price, mainly driven by positive investor sentiment on the mobile game industry. Over the same period, the Hang Seng Index only increased by 1.0%. Figure 21: Boyaa share price performance Source: Bloomberg We think Boyaa's future price performance will be anchored by: (1) continuing momentum for current games in both overseas and domestic markets; (2) future successful launches from its mobile game/webgame pipeline; and (3) overall interest in Chinese internet companies. We look at the fair value of Boyaa on the back of the following valuation metrics. (1) P/E Our main valuation methodology is forward P/E. Our target price of HK$8 implies 12.5x 15E and 17.6x 2014E diluted adjusted EPS. The company had a cash position of Rmb273 mn at 2Q13. We mainly look at two sets of companies as Boyaa's core comparables. Boyaa's PC-based game segment still accounted for over 60% of total revenue in 1H13 and is growing steadily. We look at China PC-based online game companies as the first reference comps group. The Chinese online games peers are trading at an average 2015E forward P/E of ~12.7x. These companies are mainly established client-based PC online games companies with relatively stable growth and meaningful market positions. Boyaa Interactive International Limited (0434.HK / 434 HK) 20

21 Figure 22: China PC online game companies comps Close Mkt cap EPS P/E (x) ROE EV/EBITDA (x) FCF yield (%) Company Ticker Ccy price (US$ mn) 2013E 2014E 2015E 2013E 2014E 2015E 2014E 2013E 2014E 2015E 2013E 2014E 2015E Changyou CYOU.US USD , x 6.1x 4.0x 21.3% 4.5x 4.4x 3.0x 2% 16% 24.3% Giant Interactive GA.US USD , x 10.9x 10.0x 33.6% 9.7x 8.0x 6.9x 9% 10% 11% NetEase NTES.US USD , x 12.7x 11.0x 20.2% 8.8x 7.5x 6.4x 7% 8% 9.1% Perfect World PWRD.US USD x 10.3x 7.8x 12.8% 5.8x 3.8x 2.4x 9% 14% n.a Tencent 0700.HK HKD , x 33.1x 26.2x 31.2% 30.4x 23.7x 18.4x n.a n.a n.a Forgame 0484.HK HKD x 12.8x 9.9x 45.3% 11.2x 6.2x 4.0x n.a n.a n.a Kingsoft 3888.HK HKD , x 23.5x 19.1x 21.3% 26.6x 19.8x 15.4x n.a n.a n.a NetDragon 0777.HK HKD x 13.2x 13.7x 8.1% 2.9x 3.8x 2.2x n.a n.a n.a Average 20.5x 15.3x 12.7x 24.2% 12.5x 9.6x 7.3x 7% 12% 15% * Closing price as of 13 December 2013; Source: Company data, Bloomberg, Credit Suisse estimates On the other hand, Boyaa's mobile game segment accounted for over 30% of total revenue in 1H13. We look at a second reference comps group with significant exposure to mobile games. This group is currently trading at a 2015E P/E of ~12.2x. Figure 23: Global mobile game companies comps Close Mkt cap EPS P/E (x) ROE EV/EBITDA (x) FCF yield(%) Company Ticker Ccy price (US$ mn) 2013E 2014E 2015E 2013E 2014E 2015E 2014E 2013E 2014E 2015E 2013E 2014E 2015E Gungho 3765 JP JPY ,819 5, , , x 12.6x 10.8x 60.6% 8.4x 9.0x 12.4x n.a n.a n.a Gamevil KQ KRW , , , x 12.1x 10.3x 15.0% 14.0x 10.1x 9.3x 4% 5% 6% Com2us KQ KRW , , , x 13.5x 10.2x 15.1% 16.7x 11.5x 8.9x n.a n.a n.a IGG 8002.HK HKD x 17.1x 12.8x 5.0% 151.8x 21.3x 17.5x n.a n.a n.a Wemade KQ KRW , , x 15.8x 11.3x 12.1% 16.7x 8.2x 6.2x -1% 4% 6% Gameloft GLFT.PA EUR x 23.2x 17.5x 17.6% 13.9x 10.1x 7.8x 2% 3% 4% Average 29.2x 15.7x 12.2x 20.9% 36.9x 11.7x 10.3x 2% 4% 5% * Closing price as of 13 December 2013; Source: Company data, Bloomberg, Credit Suisse estimates As Boyaa's business is a combination of domestic and overseas, as well as PC and mobile, we believe Boyaa's fair P/E range should fall between these two groups. Therefore, ~12.5x 2015E earnings is a fair valuation anchor, in our view. The company had net cash and cash equivalents of Rmb273 mn at 1H13. (2) Discounted cash flow (DCF) We see DCF also providing a reference point to gauge Boyaa's valuation. Assuming longer-term revenue growth of 5%, a longer-term OPM of 35%, a WACC of 12% and 0% terminal growth, our base-case DCF valuation yields a target price of HK$9.1 by end Figure 24: DCF base-case assumptions (%) FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E Sales growth 30.5% 31.4% 36.8% 25.0% 20.0% 10.0% 8.0% 5.0% 5.0% 5.0% 5.0% EBIT margin 26.4% 33.7% 36.8% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% NOPAT margin 22.5% 27.9% 30.7% 29.4% 29.4% 29.4% 29.4% 29.4% 29.4% 29.4% 29.4% Year-end net fixed assets turns (x) Year-end net working capital turns (x) Year-end net other assets turns (x) Cash operating taxes as % of EBIT 15.1% 17.2% 16.6% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% Year-end Invested capital turns (x) Source: Credit Suisse estimates Online game companies usually trade below their fair DCF valuation, as the market tends to place a discount on the volatility of their cash flows which are subject to the hit-and-miss factor of specific game performance. Boyaa Interactive International Limited (0434.HK / 434 HK) 21

22 Under our coverage, (1) Changyou currently trades at a ~63% discount to our DCF fair value, (2) NetEase trades at a ~16% discount to our DCF-based fair value, and (3) Shanda Games currently trades at a ~30% discount to our DCF fair value. At our target price of HK$8, Boyaa would be priced at a 12% discount to its DCF fair value, on our estimates. Figure 25: DCF sensitivity analysis Rmb mn Terminal growth (%) WACC Source: Credit Suisse estimates 0% 1% 2% 3% 4% 5% 6% 7% 9.0% % % % % % % (3) Recent M&A transactions in the global online games sector We also look at recent M&A transactions in the global online games sector, as capital market activities are on the rise on the back of exponential growth in smartphone mobile games. In the past eleven months of 2013, there have been more than 100 acquisitions in the smartphone mobile game space. We have listed the major ones below as a reference to gauge average industry views on the fair value of online game companies. Figure 26: Recent online game M&A cases Acquirer Target Deal date Investment amount (US$ mn) Deal term % of ownership P/E (2013E) P/E (2014E) Alpha Animation 51Pocket& e-kidsisland 11/11/ Cash + stock 100% 13.0/ /9.4/ Softbank & Gungho Supercell 10/15/2013 1,500 Cash 51% 100% of Playcrab, Ourpalm Playcrab & Shanggame 10/15/ Cash + stock 14.5/ /9.3 70% of Shanggame Shunrong auto part 37Wan 10/10/ Cash + stock 60% Gamevil Com2us 10/5/ Tangel Publishing Sqage 8/26/ Cash + stock 100% Beijing Ultrapower Software Camel Games 8/23/ Cash + stock 100% Phoenix Media Muhe Network 8/21/ % ZQ Game More Fun & Small Tech 8/15/ both 51% 15.6/7 8.8/4.3 Longmaster dreamz 8/6/ % Cash + deferred Shanda Game Shengzhan & Shengjing 7/28/ % 9.3 payments Huayi Brothers Yin Han Technology 7/26/ Cash + stock 51% Datang Telecom Yaowan 7/15/ Cash + stock 100% 15 Ourpalm Dovo Technology 2/5/ Cash + stock 100% Source: Company filing, Sina news, Tencent news. Most recent transactions of smartphone mobile game developers were priced at x 2013E earnings and 8.7x-11.0x 2014E earnings, according to the public disclosures for these transactions. Boyaa Interactive International Limited (0434.HK / 434 HK) 22

23 Appendix 1: Company profile Boyaa is a leading online card and board game developer and operator with a strong strategic focus on mobile games. By 2Q13, Boyaa had over 309 mn cumulative registered players, including mn cumulative registered players for webgames and 78.5 mn cumulative registered players for mobile games, located in more than 100 countries and regions. In 1H13, Boyaa's DAUs of webgames and mobile games were 1.5 mn and 3.3 mn, respectively, and MAUs of webgames and mobile games were 7.1 mn and 13.9 mn, respectively. Boyaa started its webgame business in With the increasing popularity of various portable devices, such as smartphones and tablets, in recent years, it has gradually shifted its strategic focus from webgames to mobile games. In 1H13, the revenue generated from Boyaa's webgame and mobile games accounted for 69.9% and 30.1% of total revenue, respectively. Boyaa has established a leading position in mobile card and board games in its largest target markets: China, Hong Kong, Taiwan and Thailand. According to iresearch, in the category of mobile card and board games in Apple Inc. s app store as measured by revenue in 2012, Boyaa ranked No. 1 in China, Hong Kong and Thailand and No. 2 in Taiwan. Boyaa also owns the largest mobile card and board game portfolio among all China-based online card and board game companies with games in Apple Inc. s app store. Regulation landscape Boyaa does not fall into the category of 'social gambling' or 'real-cash' because gamers cannot cash out the money they use to buy virtual tokens in the games. Texas Hold'em has been gaining popularity in China in the past several years. Significant demand is fulfilled by offline poker clubs and private poker groups. Many of them involve money, which borders on gambling in many cases. Recently, the Chinese authorities issued a regulation on offline poker, effectively banning real-money poker games in China. This should provide a further tailwind to online nonreal-money poker games such as Boyaa's Texas Hold em in the long run. Figure 27: Major regulations regarding offline poker in the PRC Regulation Authority Issue date Detail China Public Order Chinese State Council, Management and Punishment People's Congress Law ( 中 华 人 民 共 和 国 治 安 管 理 处 罚 法 ) Criminal Law of the People's Republic of China ( 中 华 人 民 共 和 国 刑 法 ) Source: Chinese State Council, People's Congress Aug-05 Jul-97 Currently, the major regulations regarding online poker are as follows: Article 70: Those who provide gambling service for profit or are involved in large-scale gambling activities will be fined Rmb500 or less or 5 days in custody or less. For serious cases, participants will be fined Rmb500-3,000 or days in custody. Article 303: Those who host gambling activities or participate in gambling activities for profit will be fined three years or less of imprisonment, criminal detention or surveillance (plus fine). For serious cases, participants will be fined 3-10 years of imprisonment plus fine. Boyaa Interactive International Limited (0434.HK / 434 HK) 23

24 Figure 28: Major regulations regarding online poker in the PRC Regulation Authority Issue date Detail Telecom Licence Measures ( 电 信 业 务 经 营 许 可 管 理 办 法 ) Notice on Regulating Operation Order of Online Games and Inspection of Gambling via Online Games ( 关 于 规 范 网 络 游 戏 经 营 秩 序 查 禁 利 用 网 络 游 戏 赌 博 的 通 知 ) Source: MIIT Apr-09 Bans Internet activities that constitute publication of any content including gambling, propagates obscenity, pornography and violence, etc. ICPs in violation must terminate such transmission, delete such information immediately, keep records and report to the governmental authorities in charge. Any provider s violation of these prescriptions will lead to the revocation of its ICP Licence and, in serious cases, the shutting down of its Internet systems. MOC/MIIT/GAPP Jan-07 (1) Prohibits online game operators from charging commissions in the form of virtual currency in connection with winning or losing of games; (2) requires online game operators to impose limits on use of virtual currency in guessing and betting games; (3) bans the conversion of virtual currency into real currency or property; and (4) prohibits services that enable game players to transfer virtual currency to other players. Boyaa's PRC legal advisor holds the view that the company has fully complied with the regulations listed above. Boyaa Interactive International Limited (0434.HK / 434 HK) 24

25 Appendix 2: Financial statement analysis Income statement (1) Revenue Boyaa s games are free to play and enable players to purchase virtual items for a better in-game experience. Its revenue is primarily derived from the sales of in-game virtual items through cooperation with three types of payment collection channels: game distribution platforms, pre-paid game card distributors and third-party payment vendors. Boyaa records revenue on a gross basis and records commission by payment collection channels as cost of revenue because it takes primary responsibility in providing game services, such as hosting the games and providing on-going updates of new content. Boyaa will initially record the proceeds from sales of prepaid game cards as an advance received from sales of prepaid game cards. This advance will be transferred to deferred revenue when the game cards are activated by the players, and then the deferred revenue will be rateably recognised as revenue when services are rendered to the respective players. In order to determine when services have been provided, Boyaa divides its virtual items into two kinds: (1) consumable virtual items, which represent items that are extinguished after consumption in the form of fixed charges levied on each round of games played. The players will not continue to benefit from the virtual items thereafter. Revenue is recognised when the items are consumed and the related services are rendered. (These accounted for 97.4% of total revenue in 1H13.) (2) Durable virtual items, which represent items that are accessible and beneficial to players over an extended period of time. Revenue is recognised rateably over the average life of durable virtual items for the applicable game. (These accounted for 2.6% of total revenue in 1H13.) In 1H13, web-based games and mobile games accounted for approximately 70%/30% of Boyaa s total revenue. Figure 29: Revenue growth Figure 30: Revenue breakdown (1H13) % % 100% 80% Mobile games 30% % 60% 40% 20% Web-based games Mobile games Total revenue YoY 0% Web-based games 70% Source: Company data Source: Company data Boyaa Interactive International Limited (0434.HK / 434 HK) 25

26 (2) Cost of revenue Boyaa s cost of revenue consists primarily of: (1) commission fees charged by payment collection channels, mainly charged by game distribution platforms payment systems. As a percentage of revenue this decreased from 36.0% in 2010 to 28.4% in 1H13, mainly due to increased proportions of revenue generated from game distribution platforms with lower commission rates. (2) Compensation and benefits for employees involved in the operation of online games. As a percentage of revenue these increased from 1.6% in 2010 to 4.1% in 1H13. (3) Business tax and related surcharges, including business tax, VAT etc. As a percentage of revenue these decreased from 4.3% in 2010 to 2.8% in 1H13. (4) Server rental expenses, as a percentage of revenue. These increased from 1.5% in 2010 to 2.0% in 1H13. (5) Other expenses, such as depreciation of property and equipment. As a percentage of revenue, these increased from 0.5% in 2010 to 0.8% in 1H13. (3) Operating expenses Boyaa s operating expenses are: Selling and marketing expenses, which mainly consist of: (1) expenses relating to advertising, marketing and brand promotion activities. These accounted for 85% of total selling and marketing expenses in 1H13; (2) salaries and benefits paid to selling and marketing staff; (3) travel and entertainment expenses relating to selling and marketing activities; and (4) other expenses, which include depreciation of computers and office equipment and general office expenses incurred by selling and marketing personnel. Selling and marketing expenses as a percentage of revenue increased from 3.9% in 2010 to 20.5% in 1H13, mainly due to Boyaa s strengthened marketing efforts in promoting online games, expanding its player base and expanding the selling and marketing team. Administrative expenses mainly consist of: (1) research and development expenses, which accounted for 27% of total administrative expenses in 1H13; (2) employee benefit expenses (37% of total administrative expenses in 1H13); (3) professional service expenses relating to audit, legal, valuation and consulting services in business operations; (4) service fees, relating to consulting and advisory services the holders of Series A Preferred Shares provided to Boyaa and incurred in 2011; (5) office rental expenses; (6) travel and entertainment expenses incurred by general and administrative personnel; (7) listing-related expenses and (8) other expenses, including general office expenses and impairment of receivables. Administrative expenses as a percentage of revenue increased from 4.7% in 2010 to 14.0% in 1H13, mainly due to increasing R&D and employee benefit expenses. Other (losses)/gains, net, mainly consist of: (1) foreign exchange losses; (2) government subsidies; (3) realised/unrealised fair value gains/(losses) on financial assets at fair value through profit or loss; (4) impairment charges on investments in associates and available-for-sale financial assets; and (5) dilution gains arising from deemed disposal of investments in certain associates. Other (losses)/gains, net as a percentage of revenue decreased from 1.0% in 2010 to -2.0% in 1H13, mainly due to increased gains from the purchase of wealth management products and government subsidies. Boyaa Interactive International Limited (0434.HK / 434 HK) 26

27 Figure 31: Cost of revenue as a percentage of revenue 5% 40% Figure 32: Operating expenses as a percentage of revenue 25% 4% 30% 20% 3% 2% 20% 15% 10% 1% 10% 5% 0% 0% H13 Employee benefit(lhs) Business tax etc(lhs) Server rental(lhs) Other expenses(lhs) Commission charges(rhs) 0% -5% H13 S&M Administrative Others Source: Company data (4) Margins Source: Company data Boyaa s gross margin increased from 56.1% in 2010 to 61.9% in 1H13, mainly due to increased proportions of revenue generated from game distribution platforms with lower commission rates. Its operating margin decreased from 46.5% in 2010 to 29.3% in 1H13, mainly due to increased selling and marketing, R&D and employee benefit expenses. Its net margin decreased from 46.8% in 2010 to 22.7% in 1H13, mainly due to the decreased operating margin. Figure 33: Gross/operating/net margin trend of Boyaa 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% H13 Source: Company data Balance sheet Cash gross margin operating margin net margin At the end of 1H13, Boyaa had cash and cash equivalents of Rmb273 mn, which mainly consisted of cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Boyaa Interactive International Limited (0434.HK / 434 HK) 27

28 Cash flow statement Operating cash flow and investing cash flow Boyaa generated net cash from operating activities of Rmb53.3 mn/138.0 mn/201.4 mn in 2010/11/12. Meanwhile, it spent net cash in investing activities of Rmb1.4 mn/85.8 mn /46.3 mn in 2010/11/12, mainly due to purchases of wealth management products. Figure 34: Ownership structure after IPO and sales of over allotment Shareholders # of shares % Category Zhang Wei 256,572, % CEO, Chairman of the Board Dai Zhikang 40,000, % Angel Investor, Executive Director Sequoia Capital 122,201, % Institutional RSU Nominee 106,737, % Others Other Public Shareholders 212,048, % Total 737,559, % Source: Company data Boyaa Interactive International Limited (0434.HK / 434 HK) 28

29 Appendix 3: Smartphone/tablet mobile game value chain Figure 35: China smartphone mobile game industry value chain Hosting Integration Account System Cloud/ IDCs Infrastructure Developers Social/user layer Distributor-owned IM/SNS Developer-owned Distribution Revenue Share Games/Updates OS-Default Telco Operators Pre-installation 3P App Markets Killer Apps Payment Revenue Share, Commission Integration Telco Bills, Prepaid Cards 3P Payment Platforms Virtual Currency Item Purchase/Paid Download Content Game Players Source: Credit Suisse research Developers Developers design game content, upgrades, and manage game economics and social activities within the game. Developers should also be taking care of hosting and servers. Publishers Publishers help developers promote, distribute, operate and optimise games. Distribution channels Channels distribute games to users. Mobile games are mainly distributed from: (1) OS- Default app stores; (2) Pre-installation; (3) Telco operators; (4) Third-party app markets; (5) Popular apps; and (6) Search engines and mobile portals. Payment (1) Telco operator payment channels, such as phone bills, prepaid cards, etc. (2) 3P payment platforms. (3) Virtual currencies. Boyaa Interactive International Limited (0434.HK / 434 HK) 29

30 Value chain economics Figure 36: Economics split in Android game value chain using telco payment channel % Gamer Purchase 30.0 Telco Payment Fee Source: Credit Suisse research 21.0 Dist. Channel 24.5 Publisher 24.5 Developer Figure 37: Economics split in Android game value chain using third-party payment channel % Gamer Purchase 3P Payment Fee Source: Credit Suisse research Dist. Channel 34.0 Publisher 34.0 Developer Boyaa Interactive International Limited (0434.HK / 434 HK) 30

31 Appendix 4: Global card and board game market The card and board game market is a section of the global social game market. In this section, we study leading social game companies and their card and board game business to provide some references to help investors understand its dynamics. The US and Europe markets Zynga (ZNGA US) Zynga is a leading provider of social game services globally. It develops and operates online social games on its own website and social networking sites such as Facebook. Zynga Poker is one of Zynga s flagship social games, representing 19%, 13% and 20% of its total revenue in 2012, 2011 and 2010, respectively. Figure 38: Zynga Poker revenue US$Mn % 20% 15% 10% 5% 0% Zynga Poker revenue % of Zynga game revenue Source: Company data According to the company release, Zynga Poker's revenue increased from US$115 mn in 2010 to US$217 mn in 2012, at a CAGR of 38%, in line with the company's overall growth rate. In December 2012, Zynga Poker was named the top grossing app of 2012 according to App Annie. In April 2013, Zynga launched ZyngaPlusPoker and ZyngaPlusCasino real-money games in the UK in partnership with Bwin.party, as a move into the real-money gambling game market. Boyaa Interactive International Limited (0434.HK / 434 HK) 31

32 Caesars Interactive Entertainment Caesars Interactive Entertainment (CIE) is one of the largest mobile and social gaming companies focused on casino entertainment and is a subsidiary of Caesars Entertainment. CIE owns the World Series of Poker (WSOP) and various social game subsidiaries all under its Playtika division. Its games include Slotomania, Caesars Casino, Bingo Blitz, Bingo Rush and World Series of Poker. In addition, CIE operates a real-money poker game in Nevada and licenses its brands in legal real money gaming jurisdictions, including the United Kingdom, France and Italy. Figure 39: Caesars Interactive Entertainment's revenue US$ Mn Source: Company data Holdings (888 LN) Listed on the LSE, 888 Holdings is one of the world s most popular online gaming entertainment providers. It provides various online gaming services such as Pacific Poker, 888ladies bingo and 888sport. Pacific Poker, 888 s multi-player online poker room, was launched in As shown in Figure 40, the online poker business of 888 Holdings is growing fast at 44% YoY in Its contribution to total revenue increased from 18% in 2011 to 23% in 1H13. Figure 40: 888 Holdings' online poker revenue US$ Mn % 23% 23% H13 25% 20% 15% 10% 5% 0% Source: Company data Online Poker revenue % of total revenue Boyaa Interactive International Limited (0434.HK / 434 HK) 32

33 Korea and Japan market NHN Entertainment NHN Entertainment, formerly known as Hangame, is the largest game arm of Korea IT giant NHN and also one of the five biggest game platforms in Korea. The featured products of NHN Entertainment are online card and board games (eg. Japanese Shogi, Korea Janggi). The web board game contributed over 50% of the company s total revenue, earning W300 bn (US$300 mn) in The development of the card and board game market in Korea has been impacted by the strict government regulations and supervision of online gambling. Figure 41: NHN Entertainment web board game revenue US$Mn % 53% 53% % 62% 60% 58% 56% 54% 52% 50% 48% 46% Web board game revenue % of total PC game revenue Source: Company data Boyaa Interactive International Limited (0434.HK / 434 HK) 33

34 China domestic market Card and board games have long been among the favourite games in China with a large user base. According to Analysys, the total user base of online card and board games in China was mn in 2012 and will rise to mn in Figure 42: China total online card and board game users Mn % % 9% 11% 10% E 2014E 16% 14% 12% 10% 8% 6% 4% 2% 0% Total online card and board game users YoY Source: Analysys Figure 43: Cumulative downloads of major mobile card and board games in leading Android app stores in China (in '000) Company Title 360 Mobile Assistant Hi Market Ourgame Fight the Landlord 33,770 3,910 Boyaa Boyaa Texas Hold'em Boyaa Fight the Landlord 7,680 2,104 Boyaa Mahjong 460 1,659 Sub-total 9,230 3,936 Tencent Happy Landlord 12,120 3,868 JJ JJ Landlord 6,130 3,713 JJ Texas Hold'em JJ Mahjong Sub-total 7,420 5,063 Poker City Boke Landlord ,590 Boke Mahjong 380 2,365 Boke Texas Hold'em Sub-total ,510 Bianfeng Bianfeng Mahjong Bianfeng Landlord 10 4 Sub-total Source: 360 Mobile Assistant, Hi Market, as of 16 October Boyaa Interactive International Limited (0434.HK / 434 HK) 34

35 Ourgame ( 联 众 ) Founded in 1998, Ourgame is the most famous online card and board company in China. In 2004, NHN purchased 50% of Ourgame s share from Sea Rainbow Holding at a price of US$100 mn. NHN decided to take advantage of this famous online game platform to explore the Chinese market, but finally failed due to the NHN Group s strategy: a changeable and seemingly aimless expansion into the non-casual game business. In 2009, the management of Ourgame made a decision to focus on the card and board business and bought back all the shares from NHN and Sea Rainbow Holding at a valuation of US$784.7 mn. Currently, Ourgame is still the largest online card and board game provider in China with registered users of 300 mn and MAU (monthly active users) of 30 mn. Ourgame is now making a very big effort to expand its mobile business. It has started to promote Android and ios card and board games since the beginning of According to its CEO, Guoliang Wu, the total number of mobile registered users of Ourgame has surpassed 50 mn, while mobile MAU has surpassed 20 mn. Figure 44: Screenshot of Ourgame mobile Fight the Landlord Source: Ourgame Boyaa Interactive International Limited (0434.HK / 434 HK) 35

36 JJWorld ( 竞 技 世 界 ) Founded in 2007, JJ featured electronic sports in card and board games. It provides e- sports services on various devices like PCs, ipads and cell phones. Its e-sports brand, JJ Sports, has 80 mn registered users and ACU (average concurrent users) of 500,000. JJ is also promoting its mobile business. As of December 2012, JJ mobile recorded 20 mn registered users. Its leading title, JJ Fight the Landlord, had an ACU count of ~100K by end JJ is collaborating with cell phone manufacturers like Huawei, Lenovo and OPPO on pre-installation and promotion. Figure 45: Screenshot of JJ's mobile Fight the Landlord Source: JJWorld. Boyaa Interactive International Limited (0434.HK / 434 HK) 36

37 Poker City ( 波 克 城 市 ) Founded in 2009, Poker City is a comprehensive card and board game platform. The platform now has accumulated 50 mn registered users on PCs with DAU (daily active users) of 3 mn. Its mobile business is also growing rapidly with total users of 4 mn. According to Renbin Xu, Vice President of Poker City, the company is targeting Internet users that are over 35 years old. Poker City hopes to maintain its monthly ARPU at around Rmb100 in order to maintain a long game life cycle. Figure 46: Screenshot of Poker City's mobile Texas Hold'em Source: Poker City Figure 47: Screenshot of Poker City's PC dice game Source: Poker City Boyaa Interactive International Limited (0434.HK / 434 HK) 37

38 Tencent QQ Game QQ Game is a casual game platform that Tencent introduced in August It has become the largest casual game community in the world. These games include board games, novel casual games and light combat games. In 2Q13, there were 184 games on the Tencent QQ Game platform, the combined PCU/ACU of the Tencent QQ Game platform is 8.4 mn/4.1 mn. Due to its large user base, Tencent is one of the largest card and board game providers in China. According to Analysys, Tencent has over a 50% market share of the China card and board game market in Figure 48: PCU of Tencent QQ game platform Mn Source: Company data Figure 49: Screenshot of Tencent's mobile Fight the Landlord Figure 50: Screenshot of Tencent mobile Texas Hold'em Source: PTBus Source: Tencent Boyaa Interactive International Limited (0434.HK / 434 HK) 38

39 Recently launched: Fight the Landlord on WeChat platform On 15 October 2013, Tencent launched Fight the Landlord, a mobile game previously available only on QQ mobile game platform on WeChat. By merging the user connection of WeChat, this version of Fight the Landlord enables users to invite their WeChat friends to join the game and also show a 'wealth ranking' for all the gamers so as to stimulate user competition. Figure 51: Screenshot of Fight the Landlord (Tencent WeChat version) Source: Tencent Boyaa Interactive International Limited (0434.HK / 434 HK) 39

40 Bianfeng ( 边 锋 ) Formerly the casual game subsidiary of Shanda, Bianfeng is one of the biggest casual game platforms in China. According to its official disclosure, its total monthly active user count was 3 mn in 2011 with nearly 500 card and board games. Bianfeng was acquired by Zhejiang Daily Media from Shanda in 2012 at a valuation of Rmb2.9 bn and forward P/E of 15x 2012E EPS. Zhejiang Daily Media forecasts Bianfeng will achieve revenue of Rmn601 mn/695 mn in 2013/14. Figure 52: Bianfeng revenue forecast RMB Mn % 18% 16% E 2013E 2014E 2015E 14% 30% 25% 20% 15% 10% 5% 0% Revenue YoY Source: Zhejiang Daily Media Boyaa Interactive International Limited (0434.HK / 434 HK) 40

41 Boyaa Interactive International Limited (0434.HK / 434 HK) 41 Figure 53: Boyaa income statement E 2014E E 2014E 2015E Rmb in Mn 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE Total Revenue ,215.1 Web-based game Mobile Game COGS Gross Profit Operating Expense Sales & Marketing Administrative (Incl R&D) Other gains/(losses) - net Share-based comp expenses EBIT Adj. EBIT (ex-sbc) Adj. EBIT (ex-sbc, Listing) Adj. EBITDA (ex-sbc) Finance Income, net Other Income, net Pre Tax Profit Tax (Expense) / Credit Minority interest Net Profit Adj. Net Profit (ex-sbc) Adj. Net Profit (ex-sbc, P-shr Val) Adj. Net Profit (ex-sbc, P-shr Val, Listing) Diluted EPS (Rmb) Adj. Diluted EPS (ex-sbc, P-shr Val, Listing) Margins (%) Gross Margin Adj. Operating Margin (ex-sbc) Adj. EBITDA Margin Net Margin Adj. Net Margin (ex-sbc) Adj. Net Margin (ex-sbc, P-shr Val) Adj. Net Margin (ex-sbc, P-shr Val, Listing) Sequential Growth (%) Revenue Gross Profit EBIT Net Profit Adj. Net Profit (ex-sbc) Adj. Net Profit (ex-sbc, P-shr Val) Adj. Net Profit (ex-sbc, P-shr Val, Listing) Diluted EPS Adj. Diluted EPS Source: Company data, Credit Suisse estimates

42 Companies Mentioned (Price as of 17-Dec-2013) Activision Blizzard, Inc (ATVI.OQ, $16.74) Baidu Inc (BIDU.OQ, $169.01) Boyaa Interactive International Limited (0434.HK, HK$7.62, NEUTRAL[V], TP HK$8.0) Changyou.com Ltd (CYOU.OQ, $29.59) Com2uS ( KQ, W22,600) DeNA (2432.T, 2,132) Electronic Arts, Inc (EA.OQ, $22.06) Gameloft (GLFT.PA, 7.48) Gamevil ( KQ, W40,450) Glu Mobile (GLUU.OQ, $3.65) Gree (3632.T, 1,018) GungHo Online (3765.T, 68,300) KongZhong (KONG.OQ, $7.9) Lenovo Group Ltd (0992.HK, HK$9.44) NC Soft ( KS, W243,000) NEXON (3659.T, 975) NHN Entertainment ( KS, W90,300) NetEase.com (NTES.OQ, $70.9) Qihoo 360 Technology Co. Ltd. (QIHU.N, $76.76) Renren Inc. (RENN.N, $2.95) Shanda Games Limited (GAME.OQ, $4.35) THE9 Ltd (NCTY.OQ, $2.44) Tencent Holdings (0700.HK, HK$465.8) Ubisoft (UBIP.PA, 9.58) WeMade Entertainment ( KQ, W31,100) Webzen ( KQ, W7,320) Zynga Inc (ZNGA.OQ, $4.11) Important Global Disclosures Disclosure Appendix Dick Wei and Evan Zhou, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies cove red by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the % and % levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Boyaa Interactive International Limited (0434.HK / 434 HK) 42

43 Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (54% banking clients) Neutral/Hold* 40% (50% banking clients) Underperform/Sell* 15% (42% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Boyaa Interactive International Limited (0434.HK) Method: Our main valuation methodology is forward P/E. Our target price of HK$8 implies 17.4x FY14E and 12.4x FY15E diluted EPS. Risk: (1) Higher revenue share to game distribution platforms, higher revenue % from telecom carrier channels and increased marketing spend could drag down gross/operating margins. (2) Competition from major user traffic owners, such as Tencent, Qihoo, Renren. (3) Execution uncertainties regarding overseas expansion. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (0434.HK) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited... Dick Wei ; Evan Zhou Boyaa Interactive International Limited (0434.HK / 434 HK) 43

44 For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at or call +1 (877) Boyaa Interactive International Limited (0434.HK / 434 HK) 44

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