Abacus Securities Corporation

P H I L I P P I N E S

Xurpas, Inc.

Initial Public Offer

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Rating

P3.97
IPO Price

P6.85
12-month Target
72% Upside

UnXurpassable
Introduction. Mobile phones are no longer just tools for communication. Smartphones, in
particular, have become digital Swiss knives with a multitude of functions. Apart from
making calls or sending text messages, a smartphone can be used as a camera, a
recorder, a music player, a GPS device, for banking services, to monitor health, watch
videos, surf the net and of course to play games. With the Philippines still in the early
stages of smartphone adoption, there is tremendous opportunity for companies that can
both deliver and monetize content. This is where Xurpas comes in.
Technology Based... Three IT guys formed Xurpas in 2001 when there were only a few
million mobile phone subscribers who were probably playing "Snake" on monochrome
Nokias. The company started out by providing enterprise solutions to Globe and other
telcos. Among its pioneering firsts were the following:

17 November 2014
Report Date
7,217.34
PSEi

X.PS
Reuters Code
X.PM
Bloomberg Code
X
Stock Exchange Code

Nicky Franco
Head of Research
(63.2) 667-8900
nicky.franco@abacus-sec.com
Frederick Evan T. Chua
Investment Analyst
(63.2) 667-8900 L2062
frederick.chua@abacus-sec.com

Source: Xurpas

Valuation Table

2012

2013

2014f

2015f

2016f Share Data

Net revenues (Pm)

136
252
379
705
1,022
Net income (Pm)*
38
120
205
407
610
EPS (P)
0.02
0.07
0.12
0.24
0.35
EPS growth (%)
89.5% 215.2% 70.1% 98.5% 50.0%
PER (x)
188.6
59.8
35.2
17.7
11.8
EBITDA (Pm)
57
143
239
477
723
Ebitda margin (%)
30.4% 41.8% 56.9% 63.1% 67.7%
EV/EBITDA (x)
0.34
0.25
1.77
1.76
1.75
Yield (%)
N/A
N/A
N/A
N/A
N/A
Book /share (P)
0.02
0.02
0.07
0.99
1.23
PBV (x)
243.2
178.7
59.2
4.2
3.4
ROE (%)
107.7% 157.7% 64.7% 20.4% 24.1%
Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash Net Cash

52-Week High/Low (P)

Relative Performance (%)

Shares outstanding (m)

Market Cap'n (Pb)*
3mo. Ave. Daily T/O (Pm)
Major Shareholders (est.)
Management
Free Float

(1m)
(3m)
(6m)
(12m)

n.a.
n.a.
n.a.
n.a.
n.a.
1,720
7,206
n.a.
80%
20%

Xurpas, Inc.

17 November 2014

Besides many firsts in mobile applications, Xurpas is also one of the pioneers of mobile
marketing wherein a participant may join contests or promos by purchasing company
products and then texting a certain 4-digit number. These promotions have been
employed by the likes of Jollibee, Nestle, P&G, Unilever, Pepsi, McDonalds, among
others. With the success of these promotions, Xurpas was able to attract companies,
including some government agencies and other telcos in need of IT-driven solutions.
Taken together, the enterprise segment of the company accounts for nearly 30% of
revenues.
...But Consumer Driven. The founders saw an emergence of a mobile phone-dependent
lifestyle, which attracted them to eventually branch out to content, and launched Games
with Friends on Globe in 2013. As the name suggests, it is an online platform where
smartphone users can play more than 100 different games with friends (or even complete
strangers). This is what the industry calls casual games. It has proven to be a hit with an
adoption rate which we estimate at about 20% - and growing - of all smartphone
subscribers on Globe's network. What is amazing is that none of the games are free to
play. Players use their prepaid load credits to challenge others over their internet capable
phones with games like Tic-Tac-Toe, Sudoku, Battleship, Reversi, etc. One of the sticky
points of these casual games besides social experience is that winning streaks against
players are rewarded by cash, pre-paid load credits, and even gadgets. This model is
unique in an industry where games are categorized as either paid (one-time cost) or
"freemium" (lots of ads or in-app purchases required) but it appears to be working.
Annual revenues from casual games have grown by a CAGR of 63% for the past 3 years.
For the first 6 months of 2014, Xurpas' top line surged 99% to Php190 million.
Annual Revenues in Millions

252

190
136
95

2011

95

2012

2013

1H 2013

1H 2014

Source: Xurpas

Affordable Need. Management expects the user base to double to 8 million by next year
driven, in part, by increasing smartphone adoption. According to IDC, the Philippines saw
a 75% YoY jump in smartphone shipments last year and yet penetration was pegged at
only 15% as of end-December 2013. Last month, Smart disclosed the number of
smartphones in its network at 20 million or about 30% of total. By end-2015, it is
projected that smartphone penetration will reach 50%. Much of this will be made possible
by the rapid decline in smartphone prices. Most models cluster around the Php5,000
level but there are now a few that are priced below Php2,000. This is worth just a week's
minimum wage, a relatively small price to pay to connect to a whole new world of
information and entertainment.

Abacus Securities Corporation

Xurpas, Inc.

17 November 2014

Cheapest Wi-Fi enabled Smartphones

Source: www.lazada.com.ph

Huge Upside. Not everyone will own a smartphone. We believe prices won't go much
lower and some people will just stick to feature phones (that can be as cheap as Php500)
on account of affordability. Also, not all smartphone users play games. Overall, we
estimate the addressable market for online casual mobile game players to be 50 million
individuals of which 25-30 million, mostly in the 10-40 age bracket, will be habitual
gamers (those who will play at least once a month). This represents growth of 500%600% over the next few years.
Potential Online Casual Game Players by 2015

Philippine Population
~105M

Potential
Casual
Game
Players/
Addressable
Market
~50M

Potential
Online
Casual
Game
Players
~30M

Smartphone
Penetration
~73.5M

Source: Abacus Estimates

Xurpas, however, has set sights beyond the Philippines with the help of one of Globe's
major shareholders. Singapore Telecom (Singtel) has apparently been impressed and is
willing to help replicate the business in other markets where it has a presence.
Management therefore plans to roll out customized versions of Games with Friends to
other emerging markets like Indonesia, Thailand, Malaysia and Bangladesh using
proceeds from the IPO. Altogether, Singtel is present in 25 countries that have a
combined population of about 650 million. The first market being targeted is Indonesia
which had an estimated population of 252 million at the end of 2013. Like the Philippines,
the vast majority of Indonesians are on prepaid and telcos' average revenue per user are
quite similar to that of Globe and Smart.

Abacus Securities Corporation

Xurpas, Inc.

17 November 2014

Smartphone Penetration in the Region

Population (millions)

Smartphone Penetration

300

40%
35%

250

35%
30%

200

25%

150

20%
14%

100

10%

15%

14%

10%
50

5%
282

160

96

30

0%
Indonesia

Bangladesh

Thailand

Malaysia

Source: Company Data

Proven Concept. The mobile games industry, which includes phones and tablets, is
littered with failures and flameouts. Franchises like Zynga's Farmville, King's Candy
Crush and Rovio's Angry Birds are all struggling now despite their initial successes.
Apparently, no matter how addictive these games are, people get tired of them for one
reason or another. Obviously, however, Singtel has access to the metrics of Games with
Friends and probably sees the business model not as a pipe dream, like many
technology startups, but rather as a proven and profitable concept. For its part,
management cites several factors for the platform's success:
1. With over 100 games and a strong pipeline of new titles plus millions of potential
opponents, each game is a unique experience.
2. High degree of scalability and cloud hosting (with one of the best names in the US)
result in minimal incremental costs as the user base expands. As evidence, net
margins have expanded to 55% as of 1H14 from 28% in 2012.
3. The core team has remained intact and has grown to 85 people.
4. Strong relationship with Globe.
Although success attracts competition, we believe the above strengths are significant
barriers to entry and will keep Xurpas ahead of others.
Earnings and Valuation. We believe that management's target of hitting 8 million casual
gamers next year is reasonable and with a realistic shot at penetrating Indonesia, rapid
growth should continue through at least 2017. Margins, on the other hand, are projected
to rise further next year but flatten out by 2016 since we expect Xurpas to first feel its way
through the Indonesian market. Given all of the above, we forecast earnings to hit
Php407 million (Php0.24 EPS) in 2015 and rise to Php811 million (Php0.47 EPS) by
2017. It is worth noting that our forecasts have not taken into account the companys
expansion plans. This in itself could give the company an even bigger boost to earnings.

Abacus Securities Corporation

Xurpas, Inc.

17 November 2014

Projected Company Earnings

Revenues
(PHP millions)

EPS
(PHP)

0.47

1,600

0.45

1,400
0.35

1,200

0.40
0.35

1,000

0.30

0.24

800

0.25

600
400
200

0.50

0.20

0.12

0.15
379

705

1,022

1,341

0.10
0.05

2014

2015

2016

2017

Source: Abacus Estimates

With the company being in its high growth phase, we believe it is inappropriate to value it
using a DCF model. It is practically impossible to forecast when Xurpas will transition to
its moderate and long term growth phases and it would be very easy to over or under
estimate the contribution from foreign operations. Instead, we believe it is best to use a
target PE ratio based on the comparative 2015 numbers of companies in the consumer
sector.
PE Ratio Comparison

Source: Abacus Estimates, Bloomberg

In our view, Xurpas deserves to trade well above the sector average shown above on
account of much stronger growth potential for at least the next three years. On the other
hand, its small float might not be able to attract institutional investors. We therefore
valued the stock near the upper end of the sector range but still at a 10% discount to
sector heavyweight JFC. At a target of 28.5x 2015 earnings, the fair value of Xurpas is
Php6.85 which gives investors an upside of 63.5% from the maximum offer price.
SUBSCRIBE.
Risks. Apart from potential competitive pressure as mentioned earlier, a slowdown in
consumer spending brought about by higher inflation, lower incomes or an economic
crisis will likely slow smartphone adoption and lower game purchases. There is also no
guarantee that Xurpas foray into foreign markets will bear fruit.

Abacus Securities Corporation

Xurpas, Inc.

17 November 2014

SHAREHOLDING DECLARATION
The analyst(s) who worked on this report may or may not own shares in the above-mentioned
security(ies). In addition, Abacus and its parent or affiliates may or may not have broking,
investment banking or other financial relations with the company(ies) that is the subject of this
report.
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KEY TO RECOMMENDATIONS
Abacus Researchs technical comments are short term in nature and are trading oriented.
Our fundamental views, on the other hand, are medium term calls, usually with a 12-month
investment horizon. Buy: More than 10% upside from the share price as of the report date.
Hold: from 5% downside to 10% upside from the share price as of the report date. Sell:
Greater than 5% downside from the share price as of the report date.

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