nvestment Highlights

Company profile: actively building presence in the mobile/online game market; earnings to usher in growth stage. As the first online game company listed in the ChiNext board, the Company is primarily engaged in development, distribution and operation of online games, and its product line covers large client games, web games and mobile games. In lH13, the Company raked in net profit of Rmb17.51mn, up 66.5% YoY; and its 2Q13 net profit increased by 255% QoQ to stand at Rmb13.66mn. The mobile game business is forecast to stage robust development in 2H13E, becoming the Company' another growth driver.

Sector analysis: the game sector is growing rapidly; and platformoperation becomes a major trend. The online game sector kept solidgrowth in 2013, and the entire market capacity is close to Rmb82bn.Amid this, fast growth of the mobile games and web games is a majorcontributor, and the combined market share of these two businesses isprojected to exceed 30% at end-2013E. Further popularization of thesmartphone lays down a solid foundation for rapid development of themobile game market; popularizing 3G technology and the acceleratingconstruction of the 4G network is set to remove the bottleneck that hasbeen subduing development of the mobile games; and meanwhile, theinternationalization strategy adds new impetus to development of theChinese game industry.

Company analysis: "horizontal integration of four businesses"will sharpen the platform's consolidated competitiveness. Focusof Zhongqingbao is gradually shifting to the faster growing web gameand mobile game segments; and besides it is actively getting access tothe social networking business, shaping up a business pattern that isintegrated with client games, web games, mobile games and socialnetworking. In addition, the Company launched a number of gameproducts in 2013. In terms of game operation, it mainly depends on theself-run platforms, which generated 84% of its income and boastshigher gross margin.

Actively seeking for acquisitive development, and pursuing forsynergy through integration. The Company plans to acquire a 51%stake in each of Shanghai Morefun Technology and Shenzhen SmallTechnology. In our view, the acquisition plan reflects the Company'sbreakthrough in acquisitive expansion, and the acquisition will boostthe counter's results. Strategically, the Company will be able to realizesharing of talents, technologies and market resources with the targetcompanies after the acquisition, and thus enjoy the value of resourcesintegration. The Company is forecast to strongly promote developmentof the mobile Internet and mobile game business through M&As.

Potential risks: corporate governance defect; slow growth of the new business, undesirable productcreativity; risks tied to the M&A progress, management and integration of acquired assets. Earnings forecast, valuation and investment rating: based on our forecast of the M&A progress, and the expectations of development of the Company's existing business and newly acquired assets,

we project the Company's diluted 2013-15E EPS to be Rmb0.41/0.92/1.25. At Rmb45.64 per share, the current share price translates t0 111/50/37x 2013-15E PE. Considering the expected exponential growth of the online game sector and the potential of fast increase in financial indicators, we initiate our coverage of the Company with an OVERWEIGHT rating, and value it at 60x 2014E PE based on the peers' valuation, suggesting a target price of Rmb55 per share. Insightful investors are advised to seize mid-term investment value based on our target price.Please read the disclaimer at the end of the report