Hidden City has probably reached peak revenue

EPS estimates down more than 20%, on new sales levels

Valuation has decreased after weak performance

Sales 8% below ABGSCe, tough on EBIT
The most notable event during Q3 was the drop in sales for G5’s largest revenue contributor Hidden City. The game is now well below the grossing ranks it had during Q4’17 and H1’18. We think it is likely that we have seen peak revenue for the title, although it should still have somewhere between 1-3 years of long tail revenue. As user acquisition spend was high, despite the lower sales, and other opex exceeded our assumptions, the sales miss affected EBIT heavily. EBIT came in at SEK 25m (33m) versus ABGSCe of SEK 45m. The higher opex is mostly attributable to a continued fast recruitment pace, which we think will slow down in the coming quarters.

Adjusting sales, post Hidden City growth era
We have lowered our sales estimates by 9.6% for ’19e-20e, to account for the development of Hidden City. We still think that three of G5’s own-developed games have potential (Mahjong, Homicide Squad and Pirates & Pearls), but not to the same extent as Hidden City. The sales trend for the rest of the current portfolio seems to be declining. In addition, no new games have been released in 2018 yet. G5 states that it has five games under development, with three due for release in the end of ’18 or beginning of ’19. Even if the new games are successful, a meaningful contribution to revenues is not expected from them until 6-12 months after launch, as that is the soft-launch period for new games.

Cut in mobile games market outlook
Newzoo, the market intelligence company, has recently cut its sales forecast for the mobile gaming industry to USD 63.2bn (70.3bn) for 2018 due to the licensing freeze stopping new games entering China, and an unexpected lack of global mobile blockbusters. It also cut the long-term forecast for 2021 to USD 91.2bn (106bn). We think that this will have a slightly negative impa