CMGE's Profit Warning Points to Lower Future Profitability; Reducing FVE to HKD 4.70

We reduce our forecasts for no-moat CMGE following its first-half profit warning. Following upward revisions to long-term R&D expense assumptions, we cut our fair value estimate for the firm to HKD 4.70 from HKD 5.70. With the company’s increasing pivot toward self-developing (as opposed to third-party publishing), we now see a wider range of potential valuation outcomes—with our bull case fair value estimate at HKD 6.60 and bear case at HKD 3.10. That said, we reiterate our view that the firm’s ongoing investments in game development should translate to revenue opportunities starting in 2023. We still have a favorable view on the company’s valuation, with shares trading at 11 times our 2022 earnings estimate and 9 times 2023 estimate.