Investment Summary

NetDragon is the leading developer, operator and publisher in game industry since it started to develop online game in 2001. In 2010 the company set up Huayu to explore education business and now education income has made up over 50% topline. Although the education business is still in loss, we see that game segment provides strong cash flow to the company. It is expected that the company is likely to turn from loss to positive earnings in 2017E. We are positive on the steady growth of game business. It is expected more new orders for education hardware and programme as well as potential monetization of software products. Our SOTP model derives the target price of HKD23.88, ‘BUY’ recommendation.

Business Overview

NetDragon, established in 1999 and headquartered in Fuzhou China, is a global leading creator of online community. In 2001 NetDragon published 17173.com, China’s top online game portal, which was sold to Sohu two years later for USD20.5mn. In 2013 NetDragon transferred its self-developed and popular smart phone service platform 91 Wireless to Baidu with a consideration of USD1.9bn, which prepared amplified cash capital for education business development. Recent years, the company focus gradually shifts from game industry to education sector. In 2015, the company acquired Promethean, the famous education hardware manufacturer, to take first steps towards global education market; for China market, the company established a wholly-owned
subsidiary Huayu (Elernity) aiming to build the largest and the most complete service platform system for education market by growing hardware, software, platform and resources. At the same time, the company proactively explores VR/AR field and tries to commercialize the technology in areas involving game, education and household, and invested in two AR technology firms in 2016.