CMGE Earnings: Slowing Growth and Elevated Costs Affect Shares; Valuation Cut by 33%

We have cut our fair value estimate for CMGE to HKD 2.80 from HKD 4.20. The primary drivers are the reduction in revenue assumptions for future game releases that we have previously deemed to have blockbuster potential and lower midcycle margins. This reflects the scenario where CMGE will struggle to compete with larger developers in the Chinese video game market. The group’s first-half results missed our expectations, as new releases failed to captivate players. We maintain our no-moat rating on CMGE due to its lack of long-cycle franchises, and the absence of resources to develop these titles. But with CMGE trading at around 9 times price/2023 earnings, we continue to view shares as undervalued. That said, uncertainty around the timing of game releases remains an overhang on earnings, capping share price performance over the near term.