[Changyou (CYOU US, BUY, TP US$37) Initiation]: New game brings opportunity to buy

• We are optimistic towards Changyou’s new mobile game TLBB Legacy and the following pipeline.
• We see Changyou starts transferring to a mobile game developer. We rate the stock BUY, with Target Price at US$37.

 
TLBB Legacy brings opportunity to buy
We are optimistic towards Changyou’s new game, TLBB Legacy (天龙八部手游), which is scheduled to be published by Tencent on May 18. High quality development team, Tencent’s traffic advantage and strong IP influence support our assessment. We expect the game to reach IOS gross billing Top 5 after publishing with RMB 200 mn average monthly gross billing. TLBB Legacy’s long term performance will depend on Changyou and Tencent’s joint works.
 
Transition to a mobile game developer just starts
Changyou’s transition from a PC game developer to a mobile game developer just begins. The new games in the upcoming pipeline, like Xuan Yuan Sword（轩辕剑传奇）, also gained Tencent’s support. We expect Changyou would have more cooperation with Tencent because Tencent is looking for more high quality MMORPG mobile game developers.
 
Large companies are benefited from sector consolidation
Large game companies are benefitted from sector consolidation after 2016. The standards for development, publishing and marketing resources all rise quickly.
 
Increasing movie screens drives up cinema advertising
We are positive in Changyou’s pre-film advertising business because China’s movie screens and viewer numbers have stable growth in recent years. We expect Changyou could maintain its market share because it has the strongest online marketing resources and the cinema competitive landscape is fragmented.
 
Initiated with BUY
We are positive in Changyou’s transition to a mobile game developer and render Changyou BUY rating with TP at USD $37, with 9.6/8.2 PE in 2017/2018.