CMGE’s Second-Half Results Severely Impacted by Game License Freeze; FVE Reduced to HKD 5.70

We lower CMGE’s fair value estimate to HKD 5.70 from HKD 7.00 following the company’s weak second-half 2021 results. Management blamed disappointing results on China’s game license freeze, which began in July 2021. While we believe the government will resume approving licenses soon, any reduction in the number of new licenses it receives every year is likely to impact CMGE’s future earnings. We have cut CMGE’s 2022 net profit estimate by 31% to factor in the short-term impact of the license freeze. We have also made on average 18% downward adjustments to longer-term earnings to factor in a moderate decline in the number of licenses CMGE will be awarded. Our fair value estimate implies a price/earnings multiple of 23 times for 2022 and 20 times for 2023.