CMGE Reports Weak Results

We lowered our fair value estimate for CMGE Technology 00302 to HKD 4.20 from HKD 4.70, following second-half 2022 results that were below our estimates. While our long-term forecasts remain largely unchanged, the firm’s cash burn in 2022 was higher than our expectations. Management struck an upbeat tone on the outlook for 2023 as domestic game license approval normalizes. With CMGE trading at around 8 times price to 2023 consensus earnings, we view its shares as undervalued.

Revenue for the second half of 2023 declined 8% year on year, but marked a sequential improvement from the 44% decline that was recorded in the first half of the year. Management attributed the second half’s revenue decline to China’s game license freeze, which limited CMGE’s ability to release new games. That said, CMGE received multiple new game licenses following China’s resumption of game approvals in April 2022, and management expects to launch at least seven new domestic titles in 2023. Coupled with another five international launches for this year, we expect CMGE to deliver year-on-year revenue growth of 60% in 2023, compared with the full-year revenue decline of 31% in 2022.

With the Chinese government continuing to issue new game licenses every month, we also see improved visibility on CMGE’s medium-term outlook. Recent rounds of approvals contain more commercial games than past issuances, which signals a favorable change of attitude from the regulator.