Chairman’s Statement

Dear Shareholders,
 

Since the Group entered the gaming industry in 2015, it has acquired Digital Extremes Limited, a Canadian successful online game developer and operator, which paved the way for the Group’s rise as a star in the video game sector. In the first half of 2017, the Group completed the acquisition of Splash Damage Limited, Fireteam Limited and Warchest Limited (namely “Splash Damage Group”), another world-class video gaming studio in the UK, marking a new milestone in our development. As a result of the Acquisition, the Group owned a number of new businesses, namely the entrusted game development business, a number of self-owned IP game products and the game service platform business with substantial backlog orders and steady cash flow, which promoted diversity of income sources and created new profit growth drivers.
 

Leveraging the extensive experience and outstanding strengths in developing and operating free-to-play online games, the Group has rapidly developed into a promising player in the highly competitive gaming market. With gaming studios and regional offices in the UK, Canada, the USA, Hong Kong and Mainland China, we serve players from over 110 countries around the world.
 

The Group’s flagship game, Warframe, has accomplished excellent achievements in the worldwide free-to-play online game market for four consecutive years, especially in the latest generation of console platform, on which it has become one of the first high-end free-to-play online games. On the Steam platform for PC, Warframe still ranks among the top three free-to-play online games. The Group will continue to deploy resources to this game and is confident that it will bring continuous success of the Group.
 

Thanks to the steady revenue stream from Warframe and revenue contribution from Splash Damage Group, the Group’s revenue from continuing operations saw a year-on-year growth of 7% to RMB420 million during the six months ended 30 June 2017 (the “Reporting Period”). In addition, the Group managed to maintain its gross profit margin at a steady level of 63% and generated a gross profit of RMB265 million.
 

The Group will continue to deploy resources to develop online games by leveraging our world-class game development capability. At the same time, we will continue to seize the opportunity to develop new strategic business and cultivate new growth drivers, thereby maximising shareholders’ value.
 

Our core strategy
 

We noticed that mobile gaming, as an emerging product type, recorded an exponential growth in market size in the past decade. As the numbers of users and active devices reached their peak, the traditional mobile game market slowed down and saturated in recent years. Players’ pursuit of gaming entertainment with higher quality, bigger screen, better features and more immersive experience is reflected in the consumer psychology and market demand. On one hand, the vibrant development of mobile games has resulted in more gamers in the gaming industry as a whole, and gamers who are no longer satisfied with the gaming experience on small screens will in turn pursue games that offer better experience; on the other hand, the improvement of virtual reality (VR) technology and processing power of mobile device will lead to the development of gaming products towards higher quality, bigger screen and better immersive experience in the future.
 

Based on the current analysis and understanding of the gaming market, we expect growing demand for products with higher quality in the global gaming market. Since more and more players will try out games that are played on big screens, the development and publishing of high-quality blockbuster games will be our main direction of future development.
 

Multiplayer online games and the multiplayer mode in traditional single-player games have become the most important niche markets in the gaming industry. As evidenced by the notable expansion of the market size, games that support interaction among players enjoy far higher user satisfaction and loyalty than those that only allow human-computer interaction. Moreover, free-to-play online games that charge for optional in-game items have dominated the world’s mobile gaming market as well as the regional gaming markets in China and South Korea, which are only second to the markets in Europe, the USA and Japan. This demonstrated the superiority and universality of the sales model and game developers are increasingly aware that the model comprising live interaction among players and ever-changing and updating gaming experience is more effective than the traditional one-off sales model.
 

Meanwhile, we discovered that with regard to big screen games, online games, especially free-to-play online games that charge for optional in-game items, took up a small proportion of major regional markets in the world, with the exception of certain Asian markets. In particular, there is a huge market for console games. Thus, we will increase our investment in this aspect. On one hand, we attach great importance to the endogenous growth of the Company. We have gradually established a highly professional game planning and operation team at the headquarter level and further integrated resources from the acquisition of overseas gaming companies. These measures have started to generate synergy within the Group and formed development pipelines of various high-quality self-developed games. On the other hand, following the successful acquisition of Digital Extremes and Splash Damage Group in 2015 and the first half of 2017, respectively, we will continue to identify outstanding game development team around the world and join hands with such teams through merger, acquisition, equity investment and joint developments. Leveraging the experience and strengths in online game design, we will continue to enhance our capability and scale of game development. Furthermore, we will seek cooperation with owners of world-known brands, for the purposes of strengthening the reserve of game development content and increasing the chance of developing a successful game by capitalizing their brand recognition. The above strategies will improve the Company’s capability in developing high-quality games, allowing us to roll out more online game products to major world market so as to garner market recognition. As a result, the Company will continue to strive to become a leading top-notch gaming company in the world that focuses on multiplayer online games as its core products.
 

Overall business development and outlook
 
During the Reporting Period, assets acquired by the Group, including Digital Extremes and Splash Damage Group, recorded steady growth. For details of their development, please refer to the respective descriptions at the later section of this report. Adhering to the above core strategy, the Group has carried out several initiatives at the global level, which include identifying world-class partners, investing in and developing high quality projects, and seeking more investment or merger, aiming at integrating with its existing business to boost the overall capabilities of the Group in game design and development, operation and profitability. Achievements in the first half of 2017 include the establishment of our Guangzhou research and development center for the large-scale free-to-play online game development plan which targets the global PC and console market. The project, which was recently announced, acquired the official exclusive rights of two world-class IPs, namely “Civilisation Online”(文明Online)and “Transformer Online” (變形金剛Online)through investments and merger and licence acquisition. Meanwhile, the Group has also set up the Beijing headquarter and the core game analyst team, design team, operation support team, business and investment team. We recruited a number of experienced consultants in the industry in order to strengthen core competitiveness, integration capability and management capability. Looking ahead to the Group’s business development in the second half of 2017, we will continue to expand our partnership base, reinforce the building of the core team and provide more support to all investees and acquirees and contracted projects. We are of the view that the successful commencement of these projects will provide the Group with excellent products that help secure market share in the global top online game industry. In view of these positive factors, we believe that the Group has built a good foundation for business growth in the coming years.
 

Digital Extremes
 

Digital Extremes is principally engaged in the development and operation of online games. Its core product, Warframe, is a world-acclaimed hit game.
 

Warframe is a free-to-play science fiction-themed multiplayer third-person shooter game available on PC and consoles. During the first half of 2017, Warframe reached its fourth anniversary and still outperformed other games and still ranked the top 3 most popular free-to-play game and top 10 most-played games in all genre in terms of hours of playing on the Steam platform. Meanwhile, it keeps breaking records of core operational statistics. The long term success of Warframe is attributable to the unique and outstanding online operational capability of the Group designed for free-to-play online games, which provides stable, frequent and synchronised update of premium game content to all platforms across the world, offers premium customer service, helps build a cohesive gamer community and facilitates communication and exchange between players and the development team through online and offline interactive activities. Based on the operational statistics, the number of registered players of Warframe grew by 3.6 million players to a total of 31.8 million players during the first half of 2017. The number of monthly active users (“MAU”) increased to approximately 2.2 million players, up 1% as compared to the corresponding period in 2016. Meanwhile, the average revenue per user (“ARPU”) remained stable. In terms of game development and update, the Warframe development team has made constant effort in incorporating new elements and technology. It is expected that Plains of Eidolon, which is the biggest update so far, will be launched in the second half of 2017. Introducing the brand new open world mode, the update rocked the whole world following the release of the trailer and the number of active users hit a record high after the news went viral. The official release of the update in the second half of the year is likely to bring long term positive effect to sustain the success of the game.
 

Besides, Digital Extremes is also committed to new product development and has increased the related investment in the first half of 2017. Currently, its development pipeline includes the following game products, which we hope will deliver new surprises to the operating results in 2018:
 

– The Amazing Eternals, a free-to-play first-person shooter game that combines card game and strategy game, with a key focus on eSports. The game is in the process of Closed Alpha testing and the official beta version is expected to be released online in the near future;
 

– A free-to-play action MMO, which is planned to commence Closed Alpha testing in 2017 and is expected to be released online in 2018.
 

Splash Damage Group
 

Splash Damage Group is a gaming studio with world-class game development capability. It is principally engaged in the entrusted game development business, self-owned IP game business and game service platform business. The Group has completed the Acquisition as at 31 March 2017.
 

Entrusted game development business
 

As at 30 June 2017, the Group had a number of backlog orders. Given that such orders will continue to bring fixed cash income until 2019 and certain orders contain profit sharing provisions that may potentially deliver more revenue in the future, we are of the view that this business segment will generate stable revenue and cash flow stream to the Group.
 

Self-owned IP game business
 

Dirty Bomb is a fast-paced first-person shooter game and is a free-to-play PC game released on the Steam platform. In the second quarter of 2017, the Group and Nexon, the former publisher of Dirty Bomb, reached an agreement to reclaim the publishing right of the game and acquire full control over its development and operation. Subsequently, the Group increased resources invested to Dirty Bomb: from April to June 2017, the game released three massive updates successively and offered new maps, heroes and gears, along with more online campaign and promotion. The above measures resulted in an explosive growth of operating revenue in the short term: as compared with April 2017, the turnover in June 2017 doubled. In addition, the improvement of gaming experience also boosted the reputation of the game and player satisfaction, with its net promoter score (NPS) on Steam surged from 71 in April to 84 in June.
 

The development and operation team of Dirty Bomb is expected to undergo major expansion and enhancement, so as to get ready for the official release of the game in March 2018 (Open Beta testing has not commenced yet). Given the on-going update and optimization of the game, coupled with more promotion and sales campaign to be carried out (including the promotion in August 2017 in Gamescom exhibition in Germany), the Group expects a significant increase in the revenue from Dirty Bomb, making it our next flagship product after Warframe.
 

Apart from that, Splash Damage Group is developing several new games. It is worth noting that, a third-person survival horror shooter game masterpiece is in the preliminary development stage and is expected to start generating revenue in as early as 2018.

 

Mr. Xu Yiran
Chairman

Hong Kong, September 15th 2017

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