Sunday 17 January 2021

Friendtimes Inc (6820 Hkex): From Zero to Hero and back to almost a zero again.


As someone who was keeping an eye on the mobile game stocks listed in HKEX, Friendtimes Inc definitely caught my eyes in 2020 as it was one of the fastest moving stocks across 2020.

From the starting price of around $1 at January 2020 to the peak of $3.89 before closing at $1.85 on 15 January 2021, it has been very volatile times for a shareholder. 

Anyone who was vested at the peak would have lost around 50% of their initial invested amount.

What led to the rise in its share price initially?

1) Covid 19

Covid 19 has brought about a shift in consumers preference in entertainment and resulted in higher amount of people turning to games on various platforms. This has resulted in more hype in gaming stocks such as FriendTimes Inc as there were more people expecting good results coming out from these companies.

2) Flagship game delivering

浮生为卿歌, a game launched on 31 December 2019, quickly captured the female market and make waves in China.

It made the 4th place as one of the top 10 growth in China iOS game market in 2020

At its peak, it propelled Friendtimes to the 15th position for May 2020 in the Top 30 China Game Developers Revenue ranking.

With the above, I was expecting quite a good result of at least 1 billion RMB revenue as well. However i felt that optimism might have been too rosy and well reflected in the share price for me to participate.

For point of note, the share price on 28 August 2020 was $3.84

What went Wrong?

1) 1H 2020 Results subpar

Despite making numerous headlines and achieving good results in game rankings, revenue only came in at an increase of 34.5% and profit after tax only improved by 8.7%.

This was largely due to an increase in Sales and Marketing expenses. The increase in its Sales and Marketing Expenses was more than its Profit Before Taxation. In short, the company was overly aggressive in achieving more traffic for its games by advertising and resulted in a sub par result.

This is also not helped by the fact that its new game 浮生为卿歌 created an attrition and eroded the revenue of its other games. Which resulted in a lesser increase in overall revenue.

Despite numerous buybacks (19 times ever since its results was released), the decline in share price continued and resulted in the position today. 

Previewing Full Year Results (Is it time to buy?)

The short answer will be No. 

The ranking of FriendTimes in the Top 30 China Game Developers Revenue ranking are as follows

After looking at this ranking, i am less than optimistic that the 2nd half will outgrow the first half. Which means that assuming results maintains, an eps of 0.14 rmb would be expected. 
Although if the selling and marketing expenses comes down, an eps of up to 0.21 is possible. 

However, given by how lacklustre the growth in 2H is likely to be, i would be unlikely be buying it at current price. The possible catalyst though is that a new explosive game is released. Also, that game will have to do well and not affect the revenue of other games for Friendtimes Inc to be successful.

To sum it up, it is a story of a game company where its growth has not worked out. It has to show its game can grow again, before its valuations will grow.

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