Archosaur Games (9990 HK) Negative profit alert due to the higher-than-expected R&D expense in 2020, but doesn’t change the company’s long term value February 16, 2021 187

PSR Recommendation: BUY Status: Maintained
Target Price: HKDHKD30.10

Investment Summary
The company’s adjusted net profit for 2020 fell 35%-40% yoy
The company issued a negative profit alert on January 21, that it is expected that the adjusted
profit for 2020 will fall by about 35%-40% yoy. The main reason for the decline is the huge yoy
increase in R&D expense and the delay in the launch of the games, causing a mismatch in
return vs investment. According to the company’s management, as of the end of 2020, the
company has more than 1,200 employees, with 87% of them being R&D personnel. Further,
the company has newly hired roughly 300 employees in 2020, of which about 90% of whom
are R&D personnel. On the other hand, in addition to the R&D expenses brought by the new
R&D personnel, the company also mentioned that since the company’s original R&D team is
one of the few R&D team in China who can effectively apply UE4 engine on mobile game
development, hence the average salary of the team has increased by a certain amount in 2020.
In the long run, we are confident in the company’s R&D capabilities. The salary increase of the
company’s original R&D team in 2020 can bind the company’s outstanding R&D talents and
reduce the loss of R&D personnel. At the same time, the expansion of the R&D team will help
the company to explore game genres other than MMORPG. Further, the company’s
continuous and substantial R&D investment can help the company maintain competitive
advantagesin the game industry that is gradually shifting toward premium games. We believe
that with the successive launch of the games in the pipeline, the company’s profit margin will
rebound.

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