Mail.ru Group - Gamer Retention in Focus

Mail.ru Group (MRG) hosted its second gaming event yesterday, where it confirmed its goal to more than double gaming segment EBITDA by 2022 with a low- to mid-twenties margin (from R4.9 bln in EBITDA at a 16% margin in 2019). It also confirmed its focus on regional expansion and diversifying its gaming portfolio. We estimate the EV of the gaming division at $1.5 bln, which is around 19% of our target EV. We reiterate our BUY on Mail.ru Group with a ruble target price of R2,531 per GDR (or $35.67 per London-listed GDR).> Regional expansion. MRG still aims to make 80% of its revenues in international markets by 2022 (versus 72% in 1H20). The US remains the key region for MRG outside Russia and the CIS, having accounted for 37% of its total gaming revenues in 1H20 (its revenue figure was very close to Russia's), while the share of the other nine largest foreign markets ranges from 2% to 7% (see the chart below). MRG noted there is a good chance the US will become its top market this year, surpassing Russia. The company also views Asia as another region for growth in the future despite the operational difficulties. Japan, China and South Korea together accounted for only 10% of gaming revenues in 1H20.> Diversification in both content source and genres. MRG hopes to maintain a balanced portfolio with a focus on in-house product development, though it could also expand through M&A. For mobile games, MRG aims to capture as many genres as possible, but for PCs and consoles it will focus on its core competencies - shooters and RPGs. > Ongoing shift to mobile. MRG targets an 80% share for mobile revenues by 2022 (up from 69% in 2019), assuming the shift will deliver EBITDA growth. It sees the segment as less risky, since investments are focused on promotions, which are only run if ROI is positive (PC and console games require significant up-front investments).> Top titles. In 1H20, the top three titles were still War Robots (out for almost five years), Warface (six years) and Hustle Castle (four years). Remarkably, thanks to a focus on core and high-value users, War Robots is still delivering positive revenue growth even though its MAU stopped growing last year; the company sees the game's revenues expanding by more than 25%this year.> Solid 2H20 pipeline; focus on post-lockdown retention, monetization. MRG announced that it has 15 games in development currently, six of which will be ready for release in 2H20 (it launched two console and three mobile games in 1H20, having originally targeted two PC/console and four mobile game launches for the year). However, it highlighted that in 2H20 the focus will be on post-lockdown retention, monetizing the user growth during the pandemic and further improving its already-released titles. The company will be more cautious with regard to new launches given its solid YTD execution.