The perfect world's second-quarter profit was lower than Wall Street forecasts.

Third-quarter guidance revenue grew 12% to 17% Year-on-year, above the average forecast of 5%. The company's outlook is improving as it launches three promising new games in the second quarter. We expect revenue growth to accelerate in the third quarter, but margins are still under pressure because of rising costs, so we cut our profit forecast for 2013 by 22%, but as we forecast revenue growth, we projected profits for 2014 and 2015 by 4% and 13% respectively. Maintain the buying rating.

Higher marketing costs, lower than expected second-quarter profit

The perfect world's second-quarter revenue grew 5% Year-on-year, up 13%, above expectations. This is the first consecutive five-quarter year-on-year increase in revenue for the company. However, as marketing costs rose, the company's profits were 8% lower than Wall Street forecasts. As a result of the introduction of three new games, the perfect world's marketing costs increased by 102%, year-on-year increase of 60%, resulting in a lower profit margin of 13% per cent year-on-year decrease of 49%. We believe, however, that profits in the second quarter have bottomed out and that third-quarter profits are expected to rebound on strong revenue growth.

Third quarter guidance revenue robust growth

Three new games will be the main driver. "Laughing and Proud" is the best performance of the new game this year. We expect the game to account for 11% of revenue in the third quarter. "The Immortal" and "The Perfect World 2" these two old games have matured, the performance will still weaken, the second quarter total revenue share has slipped to 32%, as the new game growth speed, this data may continue to reduce. As a result, their impact will continue to weaken. We expect profits to rebound by 10% in the third quarter.

Better prospects

With the successful launch of three major games, the prospect of a perfect world gaming business is improving. In addition, the company will launch a new PC game "Holy King" and some mobile games in the second half of this year. Starting in the second half, most new games will start to generate revenue. As a result, we are more optimistic about the outlook for fiscal year 2014, which increases revenue and profit forecasts by 7% and 4% respectively. However, as costs rose, we lowered the forecast profit margin for 2013 from 17% to 12%, and the profit forecast was lowered by 22%.

We maintain the buy rating and raise the target share price from $19 trillion to $25, from 6.3 times to 9 times, for the following reasons: 1 recent re-rating of the online gaming industry; 2 the prospect of a perfect world gaming business is improving.