Chairman’s Statement

Dear Shareholders,

On behalf of the board of directors (the “Board”) of the Leyou Technologies Holdings Limited (the “Company”, together
with its subsidiaries, the “Group”), I am pleased to present our annual report for the year ended 31 December 2016.
 
If the year 2015 marked the beginning of a new chapter for the Group, 2016 was another year which the Group continued
to evolve with our exciting growth strategy. In 20 May 2016, we have further acquired additional 39% stake of our very
successful Canadian video gaming studio, Digital Extremes Ltd. (“Digital Extremes”) and have increased our effective
control to 97% (the remaining 3% owned by Perfect Online Holdings Limited). Our flagship video game, Warframe, has
also become one of the top free-to-play PC and console video games globally last year. After months of negotiation, we
have signed Sell and Purchase Agreements back in the third quarter last year to acquire Splash Damage Limited, Fireteam
Limited, and Warchest Limited from their UK owner for a consideration not exceeding US$150 million. On 30 September
2016, we also managed to dispose the poultry business in China, which has been struggled since 2013, despite
numerous failed efforts in restructuring, rationalisation, and cost cutting. Upon the completion of our UK acquisitions, the
Group sets to emerge into 2017 as an international video gaming franchise. As an on-going strategy, we intend to grow
our portfolio of successful and profitable gaming companies through acquisitions in the more advanced markets. We are
also confident that synergies would be generated among our studios, and we expect new game pipeline, new projects
and initiatives such as partnership arrangements would underpin the Group’s long term growth prospects.

 

RESULTS REVIEW

The Group’s attributable revenue (on the continuing computer and video gaming operation) amounted to RMB856 million
for the fiscal year 2016, representing a headline growth rate of 165% compared to RMB323 million in 2015. However,
given the disposal of the poultry business on 30 September 2016 and we have increased from a 58% stake of Digital
Extremes to a 97% effective control on 20 May 2016, we would caution any simple year-over-year comparison. (For
a more accurate understanding of the operational performance of Digital Extremes, please refer to the Video Gaming
section of this result review). Given the increased attributable earnings contribution from Digital Extremes last year and the
marginal turnaround of the poultry business in China, the Group has reported a RMB48.6 million net profit attributed to
the shareholders for the fiscal year 2016. That was a significant improvement from a net loss of RMB81.6 million in 2015.
As a measure of operational performance, EBITDA of the continuing operation was RMB279 million in 2016, up 130%
from a year ago due to the strong organic earning growth and increased equity stake of Digital Extremes. We are pleased
to see that our strategic change in corporate direction since 2015 has started to deliver concrete financial results to our
shareholders last year.

 

VIDEO GAMING

Our 97% owned video gaming studio, Digital Extremes, had delivered yet another year of outstanding performance in
2016. Revenue for the fiscal year ended 31 December 2016 was up 122.7% to CAD147.7 million with a 174% increase
in gross profit to CAD95.8 million. Net income for the year also reached a new all-time record high of CAD58.7 million,
representing an annual growth rate of 168.5% compared to CAD21.9 million in 2015. Profitability have improved further
for the third consecutive years; 2016 gross profit and net margin were 64.9% (2015: 52.8%) and 39.8% (2015: 33.0%),
respectively. This was the backdrop behind our decision to acquire the further 39% of stake of Digital Extremes back in
May 2016 and we now have 97% of the effective control.
 
Our awards-winning online video game, Warframe has been the key growth driver for Digital Extremes’ strong growth and
record profitability last year. The game has continued to rack up a large number of players across the world and our peak
PC user base has achieved a new record level last November as we launched the biggest update ever globally on 11
November 2016. This hugely successful free-to-play third-person shooter game has consistently ranked the top 10 mostplayed
PC games on Steam most of last year. Strong revenue growth of Warframe was resulted from a stable ARPPU
(Average Revenue Per Paying User) as well as a steady increase in active user base over time. In addition to growing
users’ support, our excellent monetarisation skill is also another key for its strong financial performance. At the end of
2016, total registered players across all platforms have increased further to 28.2 million, an increase of 40.8% from a year
ago. Average Monthly Active Users rose to 2.17 million in 2016, up 30.3% from 1.66 million a year ago. Average Monthly
Concurrent Users also climbed to 61,869 in 2016 from 48,393 in 2015, representing a 27.9% year-over-year increase.
Underpinned by excellent users’ experience, on-going new contents introduction, and effective marketing and promotional
activities, we are confident that 2017 will remain a very successful year for this blockbuster video game.
 
In terms of distribution agents, Steam (PC-based revenue) contributed to more than 30% revenue for 2016, whereas
Microsoft (“Xbox”) and Sony (“PS”) platform represented approximately 23% and 19% revenues, respectively over the
same period. We see little fundamental changes over vendors mix last year and such ratio shall remain fairly stable in the
foreseeable future. In term of geographical revenue breakdown, North American remained the No.1 market with a 55%
revenue (53% in 2015) contribution for 2016. Europe was the second largest market for Warframe and it contributed
about 25% of last year revenue, same as the year before. Asia Pacific (ex-China) was 8.2% of revenue and its growth
momentum seemed to have picked up towards second half of 2016. However, China remained the only disappointment
despite of the global success of Warframe and its revenue contribution has dropped from more than 11% in 2015 (which
Warframe was first officially launched in the mainland) to below 6% for 2016. Since Digital Extremes could not publish
our video game directly into China given the restrictions on foreign publishers, our strength in self-development and selfpublishing
was not reflected in the China business. Warframe China, also known as “Galactic Armor”, is an alternative
build of Warframe published by ChangYou (PC version since September 2015) and Perfect World (console version since
November 2015) developed by Digital Extremes, targeted specifically for Chinese players. We will review our engagement
with Chinese publishing partners this year and work on rationalising and optimising the China business.

 

BUSINESS STRATEGY AND OUTLOOK

 

Video Gaming

According to a market study by Technavio, the global massive multiplayers online (“MMO”) gaming market revenue is
expected to grow at a CAGR of 12% between 2016-2020, fueled by the increasing popularity of free-to-play online
games. This finding was in line with a Newzoo report that the global PC/MMO free-to-play (“F2P”) market has achieved
a 12% CAGR between 2013-2016, at the expense of the pay-to-play (“P2P”) segment that delivered little growth over
the same period. While F2P has always been the dominant monetisation model in China, it has only gained international
popularity in recent years. We believe the transition to the F2P model for PC and console games in North America and
Europe would continue for the years to come. While its growth remains strong, the global MMO gaming market has
undergone some significantly changes in terms of revenue, player preferences, addressable players in recent years. On
the console front, both the Xbox and PS have started to offer more games digitally; and mobile online video games have
become increasingly popular in the more matured markets. The arrival of virtual reality is likely to extend the product life
cycle of the seemingly matured console and PC segments for the years to come. It would offer new opportunities as
well as challenges in developing video games in mobile devices. With these industry dynamics in mind, we will focus on
building a diversified portfolio of profitable video gaming studios with strong IPs and franchises, innovative business model,
and world class production capacity in more developed markets that have proved their success in developing high-end
console, PC, as well as mobile video games.
 
For 2017, we continue to see robust earnings growth from Digital Extremes on the back of a steadily rising user base, an
improved performance of the less penetrated Asian/China markets for Warframe, and the future contributions from new
games in the pipeline. Specifically, we are looking to launch a newly-developed and self-published online video game,
Keystone, possibly by mid-2017. We also expect further revenue upsides from Digital Extremes’ new partnership with the
US studio, Human Head in the joint-development of a new online game towards the end of this year. Our teams at Digital
Extremes are also mindful of the market potential of what a mobile and tablet version of Warframe and Keystone could
bring, as well as the emergence of virtual reality video games in the coming quarters.
 
Meanwhile, the successful completion of our UK acquisitions (Splash Damage, Fireteam, and Warchest) in the near future
would immediately enhance our investment portfolio and contribute to the Group overall revenue and earnings. Given their
different but yet complementary skill set, we are confident that synergies would be generated among our video gaming
studios. We also expect new projects and initiatives such as partnership arrangements with other studios would underpin
our longer term growth and achieve better earnings diversity. Over the medium term, we continue to look for potential
acquisitions of video gaming studios that would fit our stringent investment criteria and could potentially offer synergies to
our existing portfolio.
 

ACKNOWLEDGEMENT

I would like to take this opportunity to express my heartfelt gratitude to our shareholders, members of the Board, senior
management and all our staffs for their dedication and contribution during the year. On the behalf of the Board, I would like
to thank our clients, suppliers, and business partners for their relentless support and trust. Going forward, we shall strive
to explore further opportunities and overcome challenges, as we remain steadfast and committed to attaining better result
for the Group.

 

LIN QINGLIN
Chairman

Hong Kong, 30 March 2017

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