Cfa agh

CFA Institute Research Challenge
hosted by
Local Challenge CFA Society Poland
University of Science and Technology in Cracow

1
WSE Ticker: CDR
CD PROJEKT S.A.
Industry: Computer and video games
Interactive entertainment
Sector: Information technology
Highlights
We issue a buy recommendation with a one-year target price of PLN 18.17
which implies a 10.73% upside from its closing price of PLN 16.41 on
6th
February 2015. In our valuation we used Discounted Free Cash Flow
Method and Multiples Method. We found the Multiples Method misleading
when applied to current results due to high variability of past and forecast
cash flows, therefore we estimated discounted multiple valuations going
forward as a proxy. CD Projekt S.A. is a thriving and innovative company
effectively expanding into international markets. Our valuation does not
include dividends since they appear sporadically in growth companies from
the information technology sector.
Main price growth drivers: (1) Release of a key product - The Witcher 3 on
19th
May 2015 which will result in approximately PLN 222 million of revenue
in second quarter 2015; (2) Weakening Polish currency against the dollar or
the euro will result in higher income since the Company makes its profit
mainly in foreign currencies; (3) Arousing clients’ interest in digital
distribution; (4) Revenues from The Witcher Battle Arena exceeding expected
profit.
Main price decline drivers: (1) Strengthening Polish currency against the
dollar or the euro; (2) Failure of key games and inability to receive foreseen
income; (3) Unsuccessful release of the GOG Galaxy platform.
Sound financial position We estimate that CD Projekt will present good
financial status: (1) D/E equal to 0% in the forecast period; (2) CFO/CAPEX
47% in 2014, 744% in 2016F; (3) Cash ratio 0.45 in 2015E, 8.70 in 2017F.
Main risk issues are: related competition with influence on shaping the
market and substitute products. Regime changes in macroeconomic and
political environment as well as unsuccessful product launches can pose
additional risk.
Recomendation: BUY
Price at 6 Feb 2015 PLN
USD
16.41
4.47
12M price target PLN
USD
18.17
4.95
52-week range PLN
USD
12.96 – 18.40
3.53 – 5.01
Stock data
Market capitalization (PLN) 1.54 billion
Free float (%) 44.24%
WIG 20 (PLN) 2324.02
Average daily volume 120 427
Shares outstanding (%) 0.13%
Shares outstanding 94 950 000
Institutional holdings (%) 19.25%
Key indicators
ROE (%) 54.93%
ROA (%) 54.07%
Net debt/equity 0
Book value/share (PLN) 3.55
Price book (PLN mln) 337
Net interest cover NO DEBT
EBITDA (PLN mln) 216
EBIT margin (%) 40.70%
Comparables
Company’s name P/BV P/EBIT
ACTIVISION BLIZZARD INC 2.2 14.4
ELECTRONIC ARTS INC 5.7 35.0
UBISOFT ENTERTAINMENT 2.0 n.d.
SQUARE ENIX 2.4 22.4
KONAMI CORP 1.3 31.1
BANDAI NAMCO 1.8 10.5
CAPCOM CO LTD 1.8 17.3
TAKE-TWO INTERACTIVE
SOFTWARE
3.3 5.0
Valuation [PLN thousand]
Cost of equity 10.3%
DCF perpetuity growth
(PLN thous.)
1749
DCF terminal multiple
(PLN thous.)
1686
DCF average (PLN thous.) 1717
Multiples average (PLN thous.) 1356
Valuation weights
(DCF/Multiples)
50%/50%
Financial Summary and Implied Multiples
2014F 2015F 2016F
Sales 86 725 531 253 220 973
EBITDA 7 289 216 211 76 554
EBIT 3 748 211 907 71 420
Net profit 5 081 185 206 63 361
Assets 243 185 342 557 314 876
Liabilities 85 857 30 091 88 243
Equity 160 937 337 163 246 986
P/S 12.00 3.70 10.61
P/EBIT 423.12 9.28 32.84
P/E 195.49 10.61 37.01
P/BV 9.85 5.83 9.50
12
13
14
15
16
17
18
19
49 000
50 000
51 000
52 000
53 000
54 000
55 000
56 000
WIG
CDR
Source: www.stooq.pl, Team estimates
Figure 1. Share price vs WIG Index
Source: www.obligacjeskarbowe.pl, Team estimates

2
Business Description
History
The CD Projekt Capital Group (“the Group”) is the largest Polish group in the videogame segment. It
was established in 1994 under the name CD Projekt. In 2010 the Group merged with Optimus S.A.
which acquired 100% of CD Projekt shares. Since then the Group was listed on Warsaw Stock
Exchange (“WSE”) as Optimus S.A. In 2011 the name was changed to CD Projekt RED S.A. Currently it
is listed as CD Projekt S.A. (“the Company”). Structure of the Group is presented on Figure 2.
Core business area
CD Projekt Red Studio - CD Projekt S.A. is one of the world’s leading producer of video and computer
Role Playing Game (“RPG”) games. Game production is realized by CD Projekt Red Studio (“the
Studio”) which was founded in 2002. Until now the main product of the Studio is a series of games
called The Witcher. The first two parts were sold in over 8 million copies around the world. The third
part of The Witcher is currently under preparation. During development of The Witcher 2 the Studio
has created a proprietary advanced videogame engine called REDengine.
Strategy of the Studio:
1. Release of The Witcher 3: Wild hunt game is planned for 19th May 2015. This RPG game
will be available for different platforms such as personal computer (“PC”), Xbox One
(“XOne”) and PlayStation4 (“PS4”). It represents a segment referred to as “triple A games”
(“AAA”) with an extensive development budget, top-of-the-line production values and
industry leading marketing support. The game is going to establish a long-term support.
2. Release of Cyberpunk 2077 game (premiere date to be announced), another AAA RPG
game. The game is based on Cyberpunk® book series which has over 5 million fans of
whom 70% are from USA.
3. Production of two smaller games which will aim to support high production values.
4. Release of a game for mobile devices.
5. Sale of REDengine license.
GOG. Ltd. - GOG. Ltd. (“GOG”)is one of the foremost digital videogame distributors in the world. It
currently distributes over 850 titles originating from more than 290 business partners. The Company
operates on the American and West European market. GOG ranks as the second most popular
independent distribution platform of digital games. In late 2012 the service surpassed 2 million
unique clients mark - measured by monthly logins. GOG distributes games without Digital Rights
Management (“DRM”), a technology to control the use of digital content and devices after sale. It
applies Fair Price Policy - every gamer throughout the world pays the same price for the products of
the Company. Digital distribution of videogames is a dynamic and rapidly evolving sector where
innovation is a crucial aspect (Figure 3.). For this reason GOG has opted not to disclose its strategy
or goals. During its development GOG takes into account gamers’ preferences, who buy games in
digital version more often than in physical. Over recent years the number of digital games recipients
has increased to 53% of all of their customers. It is estimated that until 2017 the share in overall
sales will reach 78%.i Geographical sales distribution of the Company splits between 48% in North
America, 39% in Europe, the Middle East and Africa (EMEA) and 13% in rest of the world (Appendix
21.). Games production and distribution development depends on growth of GOG and the Studio.
Shareholder structure
Shareholders of the Company include three institutional investors (investment and pension funds)
exceeding 5% shareholding, founders, board members and private investors. Since September 2013
PKO TFI holds 9.48% of shares, 5.27% belongs to Amplico PTE and AVIVA OFE has 5.2% of shares. Co-
founders and board members own 35.81% of shares. Free float amounts to 44.24% of shares (Figure
5.).ii Until November 2014 www.cdp.pl - local distributor of games, movies, e-books and audiobooks
- was a part of the Group. The Company decided to focus on a global market and now, after sale and
remission of shares which belonged to the Group, the Company holds only 8.29% of www.cdp.pl
shares.
CDProjectS.A. GOG.Ltd
GOG Poland Sp. z
o.o.
Brand Projekt Sp.
zo.o.
CD PROJEKT Inc.
CD Projekt Brands
S.A.
0
20
40
60
80
2010 2011 2012 2013 2014e
Figure 3. Longterm dynamic
growth of GOG
Net profit Revenues
9.48%
5.27%
5.20%
35.81%
44.24
%
Figure 5. CD Projekt S.A.
shareholders as of January 2015
PKO TFI SA
Amplico PTE
AVIVA OFE
Co- founders & Board Members
Free float
Recentchangeson
GOG.com
GOG Galaxy development and tests
2014/07/25 - Linux games on GOG -
first 50 titles, currently over 130
2014/08/24 - movie section on GOG
2014/08/24 - local payment
methods (Sofort, Yandex,
Webmoney, other)
2014/08/24 - prices in EUR, GBP,
AUD, RUB
2014/08/24 - new version of the
service including new mobile
version
2014/11/07 - first local language
version - French
Figure 2. The CD Projekt Capital
Group Structure
Source: www.cdprojekt.com
Source: Company data, Team estimates
Source: Company data
Source: www.cdprojekt.com
Figure 4. GOG’s recent history

3
Industry Overview and Competitive Positioning
CD Projekt RED Studio
Industry Overview
Global Games Market
In 2013 the Global Games Market amounted to USD 75.5 billion of which 41% (USD 30.8 billion)iii
came from consoles and personal computers. That is the target segment for the Studio with its
flagship product The Witcher 3 which will be issued on three platforms: PC, XOne and PS4. It is
estimated that in 2017 Global Games Market may reach USD 102.9 billion with a forecast 8.1%
Compound Annual Growth Rate (CAGR). Approximately 30% of the market (USD 36 billion )iv will
come from consoles and PC. A reduction in market share is due to a significant increase in the
segment of games for mobile devices. (Figure 6.)
Video and Computer Game Genres in Overall Market
The datav in 2011-2013 (Figure 7.) shows that the genre of RPG, which representative is the Witcher
series, should be approximately 7% and 21% of the shares respectively in the market of video (PS4,
XOne) and computer (PC) games. We estimate that this trend will continue in the coming years. The
decline in the market share of RPG games in 2013 (12%) is due to the lack of new high-end game
releases for this kind of game.vi
Metacritic Scores
Known and respected by players and developers alike the Metacritic website rates games on a scale
of 1 to 100. In recent years, Metacritic has become a determinant of whether a game is worth
purchasing. Numerous players before buying a game often research how it is evaluated by the
Metacritic service. In addition, this assessment is issued before the financial results and hence is
often an indicator of potential sales volumes and a proxy for the future stock market value of the
publisher. The Studio was awarded marks of 86/100 for The Witcher 1 and 88/100 for The Witcher 2
which is a high score suggesting a high sales potential.
Competitive Positioning
One of the Best RPG Developers
The Studio developed its brand strength on the first two editions of The Witcher game selling over
8 million copies and attracting millions of fans of the series worldwide. Previous releases have
received a total of over 200 awards and not yet released The Witcher 3 earned more than 170.vii
Therefore the Studio is seen as one of the best RPG developers in the world on a par with Bethesda
Softworks (The Elder Scrolls), BioWare (Mass Effect, Dragon Age) or FromSoftware (Dark Souls).
(Figure 8.)
The Witcher 3 release on PC, Play Station 4 and Xbox One
The Witcher 3 has been hailed as one of the most anticipated games of the year 2015.viii It is
a production of an AAA ratio, which means games involving large amount of money, focused on high
quality of the final product and using advanced technology. The game is expected to be shocking
with a combination of an unprecedented immersive storyline with an extensive, interactive, open
world. The story contains over 100 hours of non-linear storyline with 36 different endings and 3
different epilogs. In addition, the game offers players a gigantic world to explore, 35 times larger
than the world of The Witcher 2. For the first time The Witcher 3 will be released simultaneously on
three platforms (PC, PS4, XOne) in order to reach out to more customers. A similar situation
occurred with The Elder Scrolls 5: Skyrim game. It was also released on three platforms which
resulted in more than twice the sales of the previous two parts of the series together. We estimate
that this will roughly be replicated in case of The Witcher 3.
Strong Team and Partners
The Studio is composed of an experienced and well coordinated team of over 300 employees.
Additionally, it has concluded profitable agreements with the world's preferred computer giants
such as Warner Bros, Home Entertainment, Namco Bandai or Valve giving the possibility of free
development of the Company.
0
20
40
60
80
100
120
2012
2013
2014E
2015E
2016E
2017E
Figure 6. Market snapshot
Global Games Market 2012-
2017 in billion dollars
MMO's
PC/MAC
Tablets
Smartphones
Consoles
Others(social + handhelds)
Best RPG
Developers
Bethesda
Softworks
SquareSoft
BioWare
Obsidian
Entertainment
CD Projekt
RED
From
SoftWare
21%
28%
12%
21%
27%
28%
28%
25%
38%
1%
0% 0%13%
6% 7%
9% 7% 7%
3% 2% 2%5% 5% 4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013
Figure 7. Computer Game Super Genres by
Units Sold
Role-Playing Casual
Strategy Sport Games
Shooter Adventure
Action Other Games, Compilations
Source: Entertainment Software Association:
Essential facts about computer and video game
industry 2012,2013,2014
Source:Team analysis
Figure 8. Best RPG Developers
Source: Source: The NPD Group/Retail Tracking Service

4
Cyberpunk 2077
In parallel since early 2013 the Studio has been working on a second AAA production Cyberpunk
2077. Based on a series of role-playing games Cyberpunk is set in a futuristic world where modern
technology coexists with a degenerate society. According to the announcement of the authors, it is
meant to be a mature, ambitious title, in which the character development is strongly associated
with a non-linear plot of the history and the different classes of characters. We estimate that
a realistic release date will be in 2017 and the revenues will be similar to the success of The Witcher
3.
The Witcher Battle Arena
Industry Overview
Global Mobile Games Market
The Global Mobile Games Market is the fastest growing industry on the gaming market. In 2013
revenues amounted to USD 17.5 billion. It is estimated that the income from the industry will
double in 2017 and can reach up to USD 35.4 billion in revenues.ix The major mobile operating
systems with the highest number of applications issued are IOS and Android. Figure 9. (markings
NAM – North America, LATAM – Latin America, W –EU – Western Europe, E-EU – Eastern Europe,
MEA – Middle East Asia, APAC – Asia Pacific) shows the increase percentage for the next three years
for Western gamers and developed markets in Asia, Eastern Europe, Middle East Asia and Latin
America combined, which are respectively 18% and 42%. In 2013, the number of mobile players
totaled 1.33 billion and it is estimated that by 2017 this figure will reach 1.82 billion.
Low Barriers to Entry
There are very low barriers to enter games industry for IOS, smartphones, tablets due to the ease
and low cost of setting up a small development company than before. The average cost of creating
a dedicated console game amounts to approximately USD 20 million while anyone can create a new
mobile game and post it for a small fee on the market.x
Difficulty in Reaching the Customer
With such a low barrier to entry, the market is flooded with new applications, so it is very difficult to
reach the customer. It is easier to succeed for games that come with a reliable and recognizable
brand or that often appear on the sales lists. The Witcher Battle Arena (“TWBA”) refers to the well-
known and popular game series. Moreover, The Witcher is characterized by high quality
workmanship. An important aspect is the Free-To-Play model with micropayments, which enjoys the
greatest popularity and profitability of mobile games. In addition, for years the Studio has been
focusing on building a strong and lasting relationship with their customers, which is why it is highly
likely that many of them will try the game out on their mobile devices. To summarize all aspects,
TWBA is an opportunity for the Company for a new place of growth and a chance to increase their
profits.
GOG.com
Industry Overview
In the video game industry digital distribution is the process of delivering video games in the form of
digital information without purchase or replacement of any physical media.
Low Barriers to Entry, Strong Competition
Starting a business by the establishment of a new distribution platform involves considerable
financial outlay. Furthermore, this market is characterized by high competition. Since 2004 the
supreme market leader is a private company Valve with its Steam platform. Due to lack of data, it is
estimated that it represents approximately 50-70% of market shares in the digital distribution of
video games. The other significant competitors are Electronic Arts (Origin) and Ubisoft (Uplay), but
in contrast to Steam, these platforms generate profits primarily from the distribution of its own
production of video games. It is estimated that both have approx. 10% of market shares.xi To enter
the market and attract customers a new company must demonstrate the competitiveness of
services and an unique sales approach of to be successful.
Unique
approach to
client
No DRM
No copy
protection
No online
verification
Just
download and
install
Qualitative
approach
Bonus
content
offered with
each game
And
thoroughly
tested
Carefully
selected
games
Players come
first
In-house
customer
service
30 days
Money Back
Guarantee
Fair price
301 355
1029
1463
0
500
1000
1500
2000
2013 2017E
Figure 9. Mobile gamers 2013-2017 in
milions
LATAM, E-EU, MEA, APAC
NAM, W-EU, OCEANIA
1.33Bn
1.82Bn
7
13 15
22
2
5
6
13
0
5
10
15
20
25
30
35
40
2012 2013 2014E 2017E
Figure 10. Global mobile games revenue in
milions of dollars
Smartphones Tablets
Figure 11. GOG’s client approach
Source: Newzoo 2014 Global Games Market Report &
Service
Source: Newzoo 2014 Global Games Market
Report & Service

5
Unique Approach to the Market
At the beginning of its operations, GOG focused on niche in older, classic games, which often were
not compatible with the latest operating systems. In addition, the company established good
relations with customers, which is reflected in the lack of existence of DRM protection in offered
products. Typically, they limit the use of a legally acquired game, which to a large extent,
discourages potential customers from purchases in this form. Moreover, the Company has a policy
of fair price (Fair Price Policy), which means that the game is offered for the same price regardless of
the country of origin of the customer. With an innovative equitable approach (Figure 11.) the digital
distribution service GOG has been recognized by "Time" magazine as one of the top 50 websites in
the world in 2013.xii
Development of Digital Distribution
An increasing percentage of digital sales in total sales is recorded annually.xiii In 2013, the
distribution of video games in digital was greater than traditional/physical. It is estimated that by
2017 it will reach 78% of total distribution.xiv The increase is due to the fact that digital distribution is
cheaper in terms of manufacturing, logistics and warehousing. In the coming years the demand for
physical retail boxed games is likely to shift to digital platforms. (Figure 12.)
Difficulty in Estimating Market Share in Digital Distribution
Most companies in the industry do not publish financial results, hence, estimation of a market share
for individual companies is extremely difficult. We are however able to make estimates when a
game developer publishes its profits from sales of each platform. In an article in September 2011, PC
Gamer presented digital sales statistics for The Witcher 2 (Figure 13.).xv It shows that Direct2Drive,
Impulse and GamersGate sold together 10 000 copies (4%), GOG had sold 40 000 copies (16%),
while at the same time Steam has sold 200 000 copies (80). On 20th February 2013 the creator of the
game "Defender's Quest" Lars Doucet posted revenues of the game for the first three months
obtained from six different digital distribution platform containing four main distributors of video
games and 2 methods of purchasing and downloading games directly from the developer (Figure
14.).xvi The results showed that GOG has obtained the second highest revenue of 4 used digital
distribution platforms, behind only Steam. Game developer Lars Doucet said that "for the major
[digital game distributors] GOG's star is clearly rising. Even under direct competition, GOG generated
14.5 % as much revenue as Steam. [...] Steam enjoys a captive market of ardent loyalists, but GOG is
swiftly becoming an attractive alternative and gaining loyalists of its own, especially in the anti-DRM
crowd. "
Based on the available information, it appears that GOG is the second largest independent digital
distributor worldwide. We estimate that it has approximately 10% of market shares, while Steam,
EA and Ubisoft have respectively approximately 65%, 10% and 10% (Figure 15.).xvii
GOG business expansion
Every year the Company is expanding its range of services. In the third quarter of 2014 GOG
expanded the business of selling movies. Currently, the Company offers more than 876 titles on
three operating systems on PC, Mac and Linux, allows payment in a growing number of currencies
(USD, EUR, GBP, AUD, RUB) and adds another language versions of the website (French).
GOG Galaxy launch
The next milestone in the development of digital distribution will be the implementation of the GOG
Galaxy platform. This will be the equivalent of the platform offered by Valve allowing, inter alia, a
game play in multiplayer mode through which the range of offered games will extend by the
growing number of games incorporating this mode. In addition, GOG Galaxy will be able to connect
to servers on other platforms such as Steam via cross-play technology. With this solution, users who
have numerous friends using other platforms will be able to communicate and play with them from
the GOG Galaxy platform. In addition, an important advantage is the lack of online activation which
allows players to play even without access to the Internet. It happens very often that competing
platforms do not allow to play in single player mode, when a person does not have an Internet
connection, which further discourages them from using such services. Another issue that
disheartens some customers is the compulsion to use the platform to install the game. GOG once
again shows how to manage its relationship with customers through the promotion of Freedom of
Choice allowing the use of their services without being forced to install additional software.
80%
16%
4%
Figure 13. Digital sales of The
Witcher 2 in first 6 months
Steam
GOG.com
Direct2Drive, Impulse Gamersgate
71% 68%
59%
47% 39% 33% 27% 22%
29% 32%
41%
53% 61% 67% 73% 78%
Figure 12. Video games distribution
split by channel
Digital distribution
Physical distribution
86%
14% 0.3%
Figure 14. Digital sales of Defender's
Quest in first 3 months
Steam GOG.com Impulse, Desura
Source: PC Gamer
Source: PC Gamer
Source: Newzoo, 2014 Global Games Market
Report

6
Investment Summary
We issue a buy recommendation for CD Projekt S.A. with a one-year target price of PLN 18.17. It
implies a 10.73% upside from current price level. The Company is a thriving and innovative group
effectively expanding into national markets. In addition, it actively runs marketing campaigns to
encourage more clients, especially in North America. Even though generated income is not stable
we forecast the growth of the stock price in next year due to new projects. The operational cash
flow is estimated to be around PLN 187 million.
Valuation Methods
We estimated target price by combining DCF Method and Multiples Method which we balanced
with equal importance. To obtain the most reliable result in the first method we have taken into
account different approaches. Using the second method we decided to choose the peer group by
focusing on the companies whose income is generated from developing and distribution of video
and computer games. We believe that this careful choices will let us estimate presumable target
price.
Debt Capacity, Dividend Yield
Young, innovative and rapidly developing companies, which include CD Projekt S.A., finance projects
mainly with retained earnings and they are disinclined to pay big dividends. Since generated income
is unstable and any tax shield may not make any profit the Board is not interested in incurring any
debts and announces that this will not change. An insignificant number of 0.016% of the Company’s
capital value is debt. This is why in further calculations we assume it is equal to zero. Moreover,
during the last four years the Company was focused on paying off debts generated by Optimus and
was not expected to pay any dividends to its shareholders.
New Projects are the Triggers
Releasing AAA games stimulates rapid growth of income. There are two big projects in progress: The
Witcher 3 and Cyberpunk 2077. The first one is already a well-known brand and a release on three
different platforms is going to exceed recent incomes multiple times. The second is aimed mainly at
Americans where Cyberpunk series is very popular. The Company is expected to earn many new
customers. Other actions such as production of a board game or a game dedicated for mobiles
strengthen the brand.
Possible Investment Risks
Beyond obvious threats connected with market, such as strengthening Polish currency or adverse
changes in macroeconomic situation, investors should be aware of other risk factors such as
consolidation of the competition, unsuccessful product launches or instant development of devices
what may require thorough changes of the production system.
CAPM
Risk free rate rf 3%
Coefficient β 1.20
Market risk premium rm – rf 6.05%
Cost of equity r 10.3%
65%
10%
10%
10%
5%
Figure 15. Market share in digital
video game distribution
Valve GOG.com
Origin Uplay
Other
0
2
4
6
8
10
12
14
16
18
20
Shareprice[PLN]
The Witcher 2
release
The Witcher 2
XBOX 360 release
1st delay in
release The
Witcher 3
2nd delay in
release The
Witcher 3
The Witcher 3
announcement
-50 000
0
50 000
100 000
150 000
200 000
250 000
[PLNthousand]
Source: PC Gamer
Source: Team computations, Appendix 12
Source: Company’s data, Team estimates
Figure 18. CD Project share prices and news flow
Figure 16. CAPM summary
Figure 17. Capital Group net income
Source: Team estimates

7
Valuation
To compute present value of the Group we used two most common methods in contemporary
financial analysis:
1. Discounted Free Cash Flow Method (“DCF”) based on Free Cash Flows to Equity
In applying DCF Method we divided the Group into four components: the Studio, GOG, CD Projekt
Invest (Brands). We forecasted future cash flows of all components using two-stage growth method.
First phase includes thorough quarterly anticipation of future financial results until 2017. In second
phase since 2018 we take an average level of cash flows in 2016 and 2017 and assume its constant
growth. We sum up anticipations of all components and discount them to their present value. Based
on this approach current value of the Company is about PLN 1774 thousand.
CD PROJEKT RED Studio
Financial future of the Studio depends mainly on the success of The Witcher 3 (“W3”).
• Sales revenues - Due to the specific revenues structure which differs according to
releasing new games we approach the problem by three different ways. (Appendix 13)
• Cost of products, goods and materials sold, selling costs - We computed an average
proportion of costs to revenues which stays at the level of about 55%.
• Income tax - We assume that the Company will pay efficient income tax at the average
level from past years equal to 13.26% of operating income.
That brings us to the following results:
Table 21.
[PLN thousand] 2014 2015 2016 2017
Sales revenues 29 043 467 433 153 109 518 094
Net income 243 177 491 54 956 197 240
Source: Team Estimates
GOG.com
Despite of its dependence from The Witcher games behavior of GOG’s finances is much more stable
than the Studio’s.
• Sales revenues - We assume a stable growth of sales revenues of 5%, which is
conservative assumption looking at revenues in the past years which have increased
respectively 298%, 166%, 138% year to year since 2011.
• Cost of revenues - Basing on financial results (Appendix 7) we can see that costs of
revenues are slightly rising. Moreover, logarithmic trend line helps us estimate this value
on level 66%. Costs will rise because GOG constantly adds to its offer new games, which
have bigger margins.
• Income tax - Computed average effective income taxes amount to 11%.
• Other - Further we assume that marketing and administrative costs will stay at the
average level from the past years. The same assumption we take for financial cost and
revenues.
Since nowadays there is a trend to buy games in digital version rather than in physical GOG has a big
chance to increase its revenues. The same positive trend we see in GOG’s share of whole market of
digital distribution which is actually about 15%. Moreover, revenues in the past years have increased
respectively 298%, 166%, 138% year to year since 2011. Finally we get:
Table 22.
[PLN thousand] 2014 2015 2016 2017
Sales revenues 67 738 74 905 78 650 82 582
Net income 7 744 9 420 9 978 10 565
The component will stay at approximately the same average level as in the past years. More in
appendices 8-9. When we sum up all data we have:
Table 23.
[PLN thousand] 2014 2015 2016 2017
Sales revenues 86 725 531 253 220 973 589 762
Net income 8 111 185 206 63 361 206 170
Figure 24. GOG -
Proportion of cost to sales revenues
0 5 000 10 000 15 000
2011
2012
2013
[PLN thousand]
Figure 20. GOG
Profit before taxation
Income tax
10%
11%
13%
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
The Witcher 3 PC+PS4+XBOX One [thous. of units]
The Witcher 2 X360 [thous. of units]
The Witcher 2 [thous. of units]
The Witcher 1 [thous. of units]
Figure 19. The Witcher’s sales

8
Table 29.
Table 26.
Table 24.
Table 27.
Table 25.
Estimating value
Using the FCFE forecast (Appendix 22) it is possible to estimate present value of the Company (Table
24 and Table 26). We used two methods to find residual value (perpetuity growth method and
terminal multiple method). Taking the average we get the value at the level PLN 1774 thousand.
2. Multiples method
The method started by calculating the median for each factor separately for our peer group
consisting of 8 companies with similar business. Received we used the median to estimate the value
of the company in relation to a given factor in the period considered. We found the Multiples
Method misleading when applied to current results due to high variability of past and forecast cash
flows, therefore we estimated discounted multiple valuations going forward as a proxy. Moreover
we are comparing a minority shareholding of listed company to other listed companies therefore no
liquidity or control discount or premium was applied. Current research shows that the size premium
is no longer present in valuations. Consequently as the value of the company in the audited year we
assumed the median of the values obtained in relation to the company's individual coefficients.
Then, the results were discounted at the present time. Finally, as the result of the comparative
method we found the arithmetic average of the discounted results for each year. Ultimately, the
estimated value of the company amounted to PLN 1 355 578 (USD 369 367).
Results
By taking average value from these two methods we get a value of the Company PLN 1568
thousand, so actually it is undervalued. By computations we find out that one year target price
should be PLN 1817 thousand.
Financial analysis
The main source of income of the Company is game production. At the time of a release of new
game there is an increase in revenue. CD Projekt recorded big profits in the first quarter of 2011 due
to the premiere of The Witcher 2 on PC, which turned out to be very successful. Another increase in
profits can be noticed in the second quarter of 2012. It was about the time when The Witcher 2 was
released on Xbox360. In these periods we see a significant growth in EBIT Margin. After these
events, the Company's profits fall due to the diminishing interest in the issued game and
preparation of the next release.
Based on the analysis of previous periods, the Company showed a low ROE. In 2011 it was about
20%. Over the years, this indicator has fallen. Since then the Company did not deliver any new
products because of a preparation of a new game - The Witcher 3, the final premiere has been
scheduled for May 2015. In our opinion, in 2015 ROE will reach the level of 54%. It will be caused by
increasing EBIT and profit from sales of this new product. DuPont analysis suggests that EBIT’s value
has a big impact on changes of ROE. Another component that has an influence on ROE is asset
turnover which describes a good use of the resources of the Company.
In previous periods, the Company’s ratio of CFO/CAPEX declines. This results in lower revenues from
the production and sales. CD Projekt in the forecast period will reach a significant increase on the
coefficient in the second quarter of 2015. Later, there will be a fall until the next release of new
product on the market. This situation will repeat on a regular basis. We can see that the company is
periodic. Assuming regularity in the premieres of new products we estimated that a similar situation
will be repeated every two years.
Perpetuity growth method
Terminal growth rate
(Polish inflation target)
2.5%
PV of residual value
[thousand PLN]
1 470
% of valuation in residual
value 79.0%
Value of 100% equity
[PLN million]
1 862
FCFE valuation 2014 2015 2016 2017
FCFE [PLN thousand] -37 008 244 279 26 565 303 508
Cost of equity 10.3% 10.3% 10.3% 10.3%
Discount factor 0.91 0.82 0.75 0.68
DCF [PLN thousand] -33 565 200 946 19 820 205 380
DCF total [PLN thousand] 392 580
Terminal multiple method
[PLN million]
Terminal EBITDA multiple –
Long-term based in Global Peer
Group
12.0
Length of forecast 4
PV of residual value
[PLN thousand]
1 294
% of valuation in residual value 76.8%
Value of 100% equity
[PLN thousand]
1 686
Global Peer Group
[PLN million]
Terminal EBITDA multiple –
Long-term based in Global Peer
Group
12.0
PV of residual value 1 294
Value of 100% equity 1 686
Summary of valuations
[PLN million]
PLN USD
DCF Valuation (Perpetuity
growth model) 1 862 507
DCF Valuation (Terminal
multiple method) 1 686 459
Comparative valuation
Global Peers 2014F 146 40
Disc. comparative
valuation Global Peers
2015F 2 353 641
Disc. comparative
2016F 756 206
Disc. comparative
2017F 2 168 591
DCF average 1 774 483
Multiples average 1 356 369
Overall average: 50% DCF,
50% Comparables
1 568 377

9
Major source of revenues of the Company is production of their own games and distribution in
digital and physical versions. We anticipate that the newest game The Witcher 3 will be a success
because of the popularity of the previous parts of the game. We estimate that in 2015 the game will
sale in 5.3 million copies in the whole world at prices set by CD Projekt. This will bring the Company
profit of PLN 533 million. Another major production is Cyberpunk 2077, which has already earned
positive reviews. We estimate its premiere in 2017 and expect it to have the same success as The
Witcher 3 because of the amount of the capital the Company has invested in the product.
Global interest in digital games can contribute to the success of GOG. In 2012, GOG gained PLN 46
million from sales. Last year resulted in PLN 63 million of revenue what implies a 38% upside in
comparison to previous year. We estimate that revenues in 2017 will exceed PLN 80 million. GOG
profits will go up to 30% of all revenues from products involving income changes depending on the
period. In addition, GOG sells games created by CD Projekt Red Studio what is profitable for the
Company.
The company is developing, has no dividend policy leads, does not have long term loans. The
Management Board avoids this types of commitment. Therefore, we do not assume that this
situation will change in the future. We also believe that the Company will not start paying dividends.
To develop itself the Company uses internally generated funds only.
Investment Risks
Probability and impact of the following factors are presented in Appendix 19.
1. Strategic Risk:
Unsuccessful product launches: The Company will not obtain the foreseen income from new
products if they do not meet tastes or expectations of the customers. To reduce the risk the
Company focuses on maintaining and taking care of present customers, who usually are strong fans
of their products, by offering numerous bonuses or on encouraging new buyers by free samples. The
Group concentrates on evolving long-term relationships with the clients what reduces unsuccessful
launches.
Wrong estimation of future sales: Before releasing a product the Company has to predict the value
of sales and prepare enough copies. In real life there are significant differences between the
possible income of various products. The Company tries to foresee the future sales value by
commercial potential of a product but it is impossible to eradicate the risk.
Delays in release dates of products: Since developing a game is a complex process, there are many
possible problems to occur. In video games market it is common to reschedule the release date
because it is very hard to evaluate how long will the creation of a game last. Moreover, financial
problems or others connected with programming can appear. The Company has no influence on
whether the suppliers providing a game finish on time but the Studio can try to minimize the risk of
not keeping to a schedule with their own production.
Game defects: Launching faulty products can harm Company’s image and discourage clients.
Establishing complex games makes them more likely to have errors. It is very hard to avoid defects,
even if the game is thoroughly tested. The Group policy is to give the customers who have already
bought the latest version of the game an enhanced version of the same game for free.
Stronger competition: Good financial situation of other companies can pose a threat to the Group
in terms of gaining rights for publishing, distribution of games or marketing campaigns. To avoid
being outperformed by the competition the Company puts an emphasis on innovative ideas because
unique and outstanding concepts will dominate and encourage more buyers. Additionally, they pay
attention to maintain good relations with present and possible partners.
Consolidation of companies: Among companies publishing video games it is very common to merge
with bigger suppliers. Such actions can lead to taking over the market by only few big providers or
can cause an end of a cooperation. The Company maintains good relations with suppliers and is
always looking for diversified sources.
2. Legal Risk:
Law regulations: Conducting economic activity all over the world exposes the Company to many
frequent legislative changes connected with tax rules, commercial law, intellectual property or legal
USA
39.3%
Germany
11.5%
Great
Britain
9.2%
Australia
4.7%
Canada
4.4%
France
2.8%
Sweden
2.3%
Finland
2.2%
Poland
2.1%
Norway
1.7%
Netherlands
1.6%
Other
18.2%
Figure 34. Geographical sales of GOG
between 1 of Jan and 30 June 2014
3.16% | 52.59%
ROE
2.09% | 52.28%
ROA
5.86% | 34.96%
NI/Sales
35.66% | 149.54%
Sales/Asset
151.11% | 100.61%
Asset/Equity
2014 | 2017
Legend
-20 000
-10 000
0
10 000
20 000
30 000
2011 2012 2013 2014
Figure 32. Cash flow pattern
CFO CFI CFF
0
50000
100000
150000
200000
250000
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
2011 2013 2015E 2017E
Figure 31. Stable Margins
Revenues EBIT Margine
EBITDA Margine
0%
20%
40%
60%
80%
100%
2011 2013 2015E 2017E
Figure 30. Relation of CAPEX to CFO
CFO CAPEX
Figure 33. DuPonta Analysis.
Source: GOG’s data

10
provisions. Any misinterpretation can have some negative results on the Company financial situation
or decision making.
Market Risk:
Exchange rate risk: Only 2.1% of customers of the Company are from Poland (Figure 34.). That
induces strong dependence on foreign currencies exchange rate in sales. Furthermore, domestic
transactions are also connected with currency exchange, because Polish prices are based on
European prices in EUR. Therefore, the exchange rates of USD/PLN and EUR/PLN have a strong
influence on the size of income in sales in PLN. GOG’s income is mainly in USD but generates costs in
USD, PLN and EUR. Strengthening polish currency has a negative influence on revenues and vice
versa (Figure 35.).
Changes in general macroeconomic situation: Political and economic crisis or any results of bad
condition of global economy have a negative impact on the activity and financial situation of the
Company. Negative economic situation can cause a loss of clients or difficulties in gaining financial
assets. The Company tries to react as soon as possible to any possible changes in order to minimize
possible loss of income.
3. Operational Risk:
IT and communication system failure: A proper performance of all of the IT or communication
systems is essential for GOG. Any inaction may cause a great fall in revenues. To avoid this situation
the Company maintains and updates IT systems.
Intellectual property: The Company is trying to eradicate illegal distribution by offering good quality
of products in affordable prices. They do not use copy protection such as DRM because the
publishers have no control over illegal sharing.
Increase in materials and components costs: Over a half of the video games distribution is
performed digitally. Thus, any increase in materials and components costs will have a margin impact
on the Company’s income.
Loss of important suppliers: GOG and the Studio rely on successful cooperation with other
companies, such as producers of applications and computer programs, publishers from whom they
obtain products, rights to publish, distribute and sell. To trivialize the risk the Company maintains
good relations with the suppliers. In addition, the Company is continuously searching for new
solutions, sources and is eager to adapt new measures.
Loss of important employees: Knowledge, experience and qualifications of members of the Board,
managers, workers and co-workers have huge importance in Company’s prosperity. Losing any of
them can have an unfavorable impact on the activity and financial results. In 2012 the Company
started an incentive program, based on the Group’s stock prices, to encourage the most important
employees. Moreover, the Company offers competitive remuneration with bonuses and good
working conditions.
Liquidity risk: The Company focuses on executing precise plans and ideas scheduled for the year.
They verify the fulfillment of it every month. The Company constantly monitors receivable accounts
and in difficult cases uses the help from experts. Moreover, the Group actively manages its financial
assets taking into account current and future outcomes.
Outdated or new platforms: Quick progress of technology is not favorable for the creators of video
games. New devices which clients are using appear, new generation consoles are getting more
popular, the Company has to adjust the production and distribution to the requirements of the
market. Until now the Company has been corresponding with customers’ requirements.
0.02
0.03
0.04
0.05
Tytułosi
euro dollar
Figure 35. EUR/PLN and USD/PLN
Exchange rate
0
1
2
3
4
5
Threath of
New
Entrants
Threat of
Substitute
Products
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Competition
in the
Industry
Figure 37. Five forces analysis for GOG Ltd.
4.5
3.5
2.5
1.5
0
1
2
3
4
5
Threath of
New Entrants
Threat of
Substitute
Products
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Competition
in the
Industry
Figure 36. Five forces analysis for CD Projekt
Red Studio
Legend
0 - No threat to the business
5 - High threat to the business
Source: Team estimates – Appendix 18
Source: Team estimates – Appendix 17
Legend
0 - No threat to the business
5 - High threat to the business
Source: National Polish Bank Website –
www.nbp.pl, Team estimates

11
Appendix 1. Statement of financial position (CDR)
ASSETS [PLN thousand] Q1.2014 Q2.2014 Q3.2014 Q4.2014 Q1.2015 Q2.2015 Q3.2015 Q4.2015 Q1.2016 Q2.2016 Q3.2016 Q4.2016 Q1.2017 Q2.2017 Q3.2017 Q4.2017
Fixed assets 95 586 91 910 94 490 91 665 92 462 93 327 94 267 95 290 96 401 97 611 98 928 100 362 101 925 103 628 105 486 107 512
Tangible assets 10 971 6 134 6 393 5 591 5 890 6 209 6 551 6 917 7 309 7 728 8 177 8 657 9 171 9 722 10 311 10 941
Intangible assets 37 297 38 459 40 470 38 799 39 290 39 828 40 419 41 068 41 780 42 563 43 424 44 370 45 411 46 556 47 816 49 203
Goodwill 46 417 46 417 46 417 46 417 46 417 46 417 46 417 46 417 46 417 46 417 46 417 46 417 46 417 46 417 46 417 46 417
Investment property - - - - - - - - - - - - - - - -
Investments in subsidiaries - - - - - - - - - - - - - - - -
Shares in subsidiaries excluded
from consolidation
- - - - - - - - - - - - - - - -
Financial assets available for
sale (long-term)
- - - - - - - - - - - - - - - -
Other financial assets - - - - - - - - - - - - - - - -
Deferred tax assets 578 561 844 587 594 601 608 615 622 630 638 646 654 662 670 679
Other fixed assets 323 339 366 272 272 272 272 272 272 272 272 272 272 272 272 272
Current assets 144 324 170 989 171 422 153 932 160 243 205 156 208 788 272 690 154 985 183 420 221 815 236 556 184 325 237 529 247 981 315 948
Inventories 58 170 67 197 80 699 88 891 106 669 64 002 32 001 39 675 52 241 61 108 74 076 88 891 106 669 64 002 32 001 39 675
Trade receivables 25 047 27 875 20 607 9 731 6 066 10 213 4 132 10 841 7 813 15 447 8 847 12 175 8 533 17 716 9 777 13 780
Claims arising from the current
income tax
1 851 2 098 218 - - - - - - - - - - - - -
Other receivables 8 109 7 948 8 395 11 492 6 384 9 825 7 157 9 072 10 795 14 687 10 720 13 863 12 122 15 791 12 103 13 803
sale (short-term)
- - - - - - - - - - - - - - - -
Financial assets at their fair
value by financial result
- - - - - - - - - - - - - - - -
Other financial assets 908 834 2 730 2 744 2 757 2 771 2 785 2 799 2 813 2 827 2 841 2 855 2 870 2 884 2 898 2 913
Prepaid expenses 8 390 13 861 13 723 2 661 2 745 55 577 2 860 2 881 2 989 2 972 2 851 2 730 2 677 55 366 2 641 2 705
Cash and cash equivalents 41 849 51 176 45 050 38 413 35 621 62 768 159 853 207 422 78 335 86 379 122 479 116 042 51 454 81 770 188 561 243 072
Assets classified as held for
sale
- - - - - - - - - - - - - - - -
TOTAL ASSETS 239 910 262 899 265 912 245 598 252 706 298 484 303 056 367 979 251 386 281 031 320 742 336 918 286 250 341 157 353 467 423 460

12
LIABILITIES [PLN thousand] Q1.2014 Q2.2014 Q3.2014 Q4.2014 Q1.2015 Q2.2015 Q3.2015 Q4.2015 Q1.2016 Q2.2016 Q3.2016 Q4.2016 Q1.2017 Q2.2017 Q3.2017 Q4.2017
Equity 169 006 172 559 170 128 160 937 154 349 242 472 269 833 337 163 202 601 217 655 234 233 246 986 197 313 291 090 320 330 391 999
Equity attributable to
shareholders of the Parent
Company
168 250 165 860 163 974 154 783 148 195 236 318 263 679 331 009 196 447 211 501 228 079 240 832 191 159 284 936 314 176 385 845
Share capital 94 950 94 950 94 950 84874 84874 84874 84874 84874 84874 84874 84874 84874 84874 84874 84874 84874
Suppl. capital, incl. sales of
shares above nominal price
119 730 119 730 119 730 113937 113937 113937 113937 113937 113937 113937 113937 113937 113937 113937 113937 113937
Own shares - - - - - - - - - - - - - - - -
Other reserve capital 1 139 1 396 1 624 1624 1624 1624 1624 1624 1624 1624 1624 1624 1624 1624 1624 1624
Exchange rate differences 688 624 180 371 478 473 472 472 471 470 471 472 473 473 474 475
Retained earnings 48 379 54 133 54 133 54133 54133 54133 54133 54133 22477 22477 22477 22477 20268 20268 20268 20268
Net profit (loss) for the
reporting period
1 498 4 541 1 623 8110 2371 90489 117849 185178 18960 34013 50592 63345 11464 105243 134484 206153
Minority share capital 756 6 699 6 154 6154 6154 6154 6154 6154 6154 6154 6154 6154 6154 6154 6154 6154
Long-term liabilities 4 868 6 188 5 789 4 979 5 029 14 501 5 125 5 176 5 230 5 287 5 347 5 409 5 475 5 544 5 616 5 692
Credits and loans - - - - - - - - - - - - - - - -
Other financial liabilities 203 350 457 366 366 366 366 366 366 366 366 366 366 366 366 366
Other long-term liabilities - - - - - - - - - - - - - - - -
Deferred income tax liabilities 3 351 4 415 3 928 4163 4205 13677 4302 4353 4406 4463 4523 4585 4651 4720 4792 4868
Deferred revenues 1 277 1 386 1 367 433 441 441 441 441 441 441 441 441 441 441 441 441
Provisions for employee
benefits and similar liabilities
37 37 37 16 16 16 16 16 16 16 16 16 16 16 16 16
Other provision - - - - - - - - - - - - - - - -
Short-term creditors 66 036 84 152 89 995 79 681 93 327 41 510 28 097 25 641 43 555 58 089 81 163 84 525 83 462 44 523 27 520 25 770
Credits and loans 24 25 27 2 2 2 2 2 2 2 2 2 2 2 2 2
Trade liabilities 24 248 35 943 36 843 16657 16455 16981 9498 10792 8763 15532 15974 17477 16941 18152 10223 11650
Liabilities for current income
tax
433 829 20 304 304 304 304 304 304 304 304 304 304 304 304 304
Other liabilities 40 746 43 938 48 367 58289 71820 19626 13615 9892 29820 37599 60225 62090 61568 21422 12346 9167
Deferred revenues 202 2 858 4 107 3642 3958 3800 3879 3840 3859 3849 3854 3852 3853 3853 3853 3853
Provision for pensions and
similar benefits
97 185 123 191 192 193 194 195 196 198 198 197 195 195 196 196
Other provision 66 47 42 225 224 233 235 246 240 235 234 231 228 225 226 228
Liabilities dir. associated with
assets classified for sale
- - - - - - - - - - - - - - - -
TOTAL LIABILITIES 239 910 262 899 265 912 245 597 252705 298483 303055 367980 251386 281031 320742 336919 286249 341157 353467 423461

13
Appendix 2: Statement of Comprehensive Income (CDR)
Per quarter
cumulative (annual)
[PLN thousand]
Q1.2014 Q2.2014 Q3.2014 Q4.2014 Q1.2015 Q2.2015 Q3.2015 Q4.2015 Q1.2016 Q2.2016 Q3.2016 Q4.2016 Q1.2017 Q2.2017 Q3.2017 Q4.2017
Sales revenues 30 804 74 588 110 754 86 725 17 785 261 209 343 176 531 253 60 780 117 546 172 291 220 973 42 026 301 514 389 252 589 762
Revenues from sales of
products
4 801 12 366 15 141 20 761 5 210 226 778 295 970 465 470 47 406 81 049 122 270 151 346 27 879 262 983 336 416 516 234
Revenues from sales of services 13 426 34 317 46 700 58 927 12 547 34 383 47 078 65 571 13 291 36 335 49 782 69 316 14 072 38 385 52 621 73 249
Revenues from sales of goods
and materials
12 577 27 905 48 913 7 037 28 48 128 212 83 162 239 311 74 146 215 280
Cost of products, goods and
materials sold
23 075 53 483 82 135 56 098 10 383 94 659 125 205 191 002 24 108 50 341 72 613 95 093 18 507 108 703 141 589 212 023
Cost of products and services
sold
11 241 28 419 38 926 49 601 10 420 94 742 125 282 191 070 24 096 50 315 72 575 95 049 18 499 108 691 141 575 212 012
Value of goods and materials
sold
11 834 25 064 43 209 6 497 37 83 77 67 12 26 38 44 8 12 14 11
Gross profit (loss) from sales 7 729 21 105 28 619 30 627 7 402 166 550 217 971 340 251 36 672 67 205 99 678 125 880 23 519 192 811 247 662 377 739
Other operating revenues 1 867 3 857 4 479 4 738 485 971 1 456 1 942 485 971 1 456 1942 485 971 1 456 1 942
Selling costs 5 204 13 113 20 439 15 926 2 787 58 505 76 505 119 301 12 939 24 289 35 787 45 450 8 438 67 795 87 066 132 674
General and administrative
costs
3 101 6 983 10 328 9 780 2 381 4 761 7 142 9 522 2 381 4 761 7 142 9 522 2 381 4 761 7 142 9 522
Other operating expenses 682 870 1 767 1473 370 736 1096 1462 363 722 1077 1429 358 713 1075 1437
Operating profit (loss) 609 3 996 564 8 188 2 349 103 520 134 684 211 907 21 475 38 405 57 128 71 420 12 827 120 513 153 835 236 047
Financial revenues 1 281 2 396 2 658 2 152 443 886 1 329 1 773 443 886 1 329 1 773 443 886 1 329 1 773
Financial expenses 59 78 597 590 89 178 268 357 89 178 268 357 89 178 268 357
Profit (loss) before taxation 1 831 6 314 2 625 9 749 2 703 104 227 135 746 213 323 21 829 39 112 58 190 72 836 13 181 121 221 154 897 237 463
Income tax 445 1 694 1 468 1 638 330 13 732 17 880 28 117 2 861 5 089 7 586 9 475 1 713 15 971 20 401 31 293
Profit (loss) from continuing
operations
1 386 4 620 1 157 8 111 2 373 90 495 117 865 185 206 18 968 34 023 50 605 63 361 11 468 105 251 134 496 206 170
Net profit (loss) attributable to
minority interests
112 79 466 - - - - - - - - - - - - -
Net profit (loss) attr. to eq.
hold. of parent entity
1 498 4 541 1 623 8 111 2 373 90 495 117 865 185 206 18 968 34 023 50 605 63 361 11 468 105 251 134 496 206 170

14
Appendix 4. Statement of financial position (The Studio)
Fixed assets 6 369 6 615 25 162 25 733 26 425 27 182 28 009 28 914 29 904 30 988 32 175 33 474 34 896 36 454 38 160 40 029
Tangible assets 3 068 3 177 3 161 3 394 3 644 3 913 4 201 4 511 4 843 5 200 5 584 5 995 6 437 6 911 7 421 7 968
Investments in subsidiaries - - 17 867 17 867 17 867 17 867 17 867 17 867 17 867 17 867 17 867 17 867 17 867 17 867 17 867 17 867
Current assets 77 795 84 903 111 221 112 431 127 926 162 765 170 832 229 850 119 212 136 554 180 873 189 900 144 920 188 134 204 058 268 252
Inventories 52 241 61 108 74 076 88 891 106 669 64 002 32 001 39 675 52 241 61 108 74 076 88 891 106 669 64 002 32 001 39 675
income tax
1 029 2 030 28 - - - - - - - - - - - - -
Other receivables 6 264 8 723 7 595 10 013 10 013 10 013 10 013 10 013 13 201 13 201 13 201 13 201 13 201 13 201 13 201 13 201
Other financial assets 100 5 - - - - - - - - - - - - - -
Prepaid expenses 411 222 508 310 310 53 025 310 310 310 310 310 310 310 53 025 310 310
TOTAL ASSETS 84 164 91 518 136 383 138 164 154 351 189 946 198 841 258 764 149 117 167 543 213 048 223 373 179 816 224 588 242 218 308 282
LIABILITIES Q1.2014 Q2.2014 Q3.2014 Q4.2014 Q1.2015 Q2.2015 Q3.2015 Q4.2015 Q1.2016 Q2.2016 Q3.2016 Q4.2016 Q1.2017 Q2.2017 Q3.2017 Q4.2017
Equity 45 656 45 820 60 905 62 501 63 811 149 191 175 168 240 235 110 214 122 316 137 374 147 700 102 609 193 258 220 886 289 984
Equity attributable to
shareholders of the Parent
Company
45 656 45 820 60 905 62 501 63 811 149 191 175 168 240 235 110 214 122 316 137 374 147 700 102 609 193 258 220 886 289 984
Share capital 7 050 7 050 7 412 7 412 7 412 7 412 7 412 7 412 7 412 7 412 7 412 7 412 7 412 7 412 7 412 7 412
- - 17 500 17 500 17 500 17 500 17 500 17 500 17 500 17 500 17 500 17 500 17 500 17 500 17 500 17 500
Retained earnings 37 832 37 832 37 832 37 832 37 832 37 832 37 832 37 832 67 832 67 832 67 832 67 832 67 832 67 832 67 832 67 832
reporting period
774 938 -1 839 -243 1 067 86 447 112 424 177 491 17 470 29 572 44 630 54 956 9 865 100 514 128 142 197 240
Long-term liabilities 778 1 672 980 931 939 10 367 939 939 939 939 939 939 939 939 939 939
Deferred income tax liabilities 213 1 124 442 667 667 1095 667 667 667 667 667 667 667 667 667 667
Deferred revenues 490 481 477 218 226 226 226 226 226 226 226 226 226 226 226 226
6 6 6 - - - - - - - - - - - - -

15
Credits and loans - 2 7 - - - - - - - - - - - - -
Trade liabilities 2 152 2 978 8 467 8 467 10 160 5 000 2 345 2 201 2 152 2 978 8 467 8 467 10 000 5 000 2 345 2 201
Other liabilities 35 422 40 920 65 878 65 878 79 054 25 000 20 000 15 000 35 422 40 920 65 878 65 878 65 878 25 000 17 658 14 768
similar benefits
20 20 20 47 47 47 47 47 47 47 47 47 47 47 47 47
Other provision 22 11 28 33 33 34 35 36 36 36 36 36 36 36 36 36
TOTAL LIABILITIES 84 164 91 518 136 380 138 164 154 351 189 946 198 841 258 764 149 117 167 543 213 048 223 374 179 816 224 587 242 218 308 282
Appendix 5: Statement of Comprehensive Income (The Studio)
Per quarter cumulative
(annual) [PLN thousand]
Sales revenues 5 005 12 911 22 885 29 043 5 771 227 822 297 491 467 433 47 848 81 927 123 589 153 109 28 340 263 906 337 810 518 094
products
4 946 12 828 15 839 21 870 5 644 227 569 297 112 466 928 47 722 81 674 123 210 152 604 28 214 263 654 337 432 517 589
Revenues from sales of services - - - - - - - - - - - - - - - -
and materials
59 83 7 046 7 172 126 253 379 505 126 253 379 505 126 253 379 505
materials sold
1 675 4 500 12 541 14 494 1 832 71 435 93 289 146 564 15 017 25 719 38 798 48 072 8 904 82 742 105 923 162 439
sold
1 643 4 449 5 971 7 861 1 769 71 308 93 099 146 310 14 953 25 592 38 608 47 818 8 841 82 615 105 733 162 185
sold
32 51 6 570 6 633 63 127 190 254 63 127 190 254 63 127 190 254
Other operating revenues 621 1 323 1 841 2 200 359 717 1 076 1 434 359 717 1 076 1 434 359 717 1 076 1 434
Selling costs 1 419 4 734 8 270 9 731 1 369 54 044 70 571 110 885 11 351 19 435 29 318 36 321 6 723 62 604 80 136 122 903
costs
1 553 3 523 5 184 6 912 1 762 3 524 5 286 7 048 1 762 3 524 5 286 7 048 1 762 3 524 5 286 7 048
Other operating expenses 556 725 1 178 1 333 155 310 464 619 155 310 464 619 155 310 464 619
Operating profit (loss) 423 752 -2 447 -1 228 1 011 99 226 128 956 203 751 19 922 33 656 50 799 62 484 11 155 115 444 147 076 226 519
Financial revenues 622 839 1 261 1 663 402 804 1 206 1 608 402 804 1 206 1 608 402 804 1 206 1 608
Financial expenses 7 -354 531 715 184 368 551 735 184 368 551 735 184 368 551 735
Profit (loss) before taxation 1 038 1 945 -1 717 -280 1 230 99 663 129 610 204 623 20 140 34 093 51 453 63 357 11 373 115 880 147 731 227 392
Income tax 264 1 007 122 -37 163 13 215 17 186 27 133 2 671 4 521 6 823 8 401 1 508 15 366 19 589 30 152
operations
774 938 -1 839 -243 1 067 86 447 112 424 177 491 17 470 29 572 44 630 54 956 9 865 100 514 128 142 197 240

16
Appendix 6. Statement of financial position (GOG.com)
Fixed assets 1 707 2 169 2 846 2 955 3 053 3 155 3 260 3 370 3 484 3 602 3 724 3 852 3 984 4 122 4 265 4 413
Tangible assets 897 900 916 962 1 011 1 062 1 116 1 172 1 231 1 294 1 359 1 428 1 500 1 576 1 655 1 739
Intangible assets 809 1 246 1 929 1 977 2 027 2 077 2 129 2 182 2 237 2 293 2 350 2 409 2 469 2 531 2 594 2 659
Goodwill - - - - - - - - - - - - - - - -
Investments in subsidiaries - - - - - - - - - - - - - - - -
from consolidation
- - - - - - - - - - - - - - - -
sale (long-term)
- - - - - - - - - - - - - - - -
Other fixed assets - - - - - - - - - - - - - - - -
Current assets 23 466 36 348 23 394 26 438 17 571 27 290 23 282 27 524 19 186 29 526 25 277 29 771 21 400 32 239 27 811 32 530
Inventories - - - - - - - - - - - - - - - -
income tax
- - 117 - - - - - - - - - - - - -
Other receivables 610 2 431 3 245 2 328 1 256 3 958 1 622 2 800 1 511 4 760 1 951 3 368 1 817 5 726 2 347 4 051
sale (short-term)
- - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - -
Prepaid expenses 2 379 1 410 1 281 2 272 2 355 2 471 2 473 2 498 2 605 2 585 2 466 2 346 2 293 2 264 2 255 2 320
Assets classified as held for sale - - - - - - - - - - - - - - - -
TOTAL ASSETS 25 173 38 517 26 240 29 392 20 624 30 445 26 542 30 894 22 670 33 127 29 002 33 623 25 384 36 361 32 076 36 944

17
Equity 16 223 18 931 12 427 14 842 8 026 11 192 12 996 15 664 9 793 13 140 15 055 17 879 12 118 15 654 17 687 20 673
Equity attributable to shareholders
of the Parent Company
16 223 18 931 12 427 14 842 8 026 11 192 12 996 15 664 9 793 13 140 15 055 17 879 12 118 15 654 17 687 20 673
Share capital 86 86 86 86 86 86 86 86 86 86 86 86 86 86 86 86
1 188 1 188 1 189 1 189 1 189 1 189 1 189 1 189 1 189 1 189 1 189 1 189 1 189 1 189 1 189 1 189
Own shares - - - - - - - - - - - - - - - -
Other reserve capital - - - - - - - - - - - - - - - -
Exchange rate differences 227 163 675 854 - - - - - - - - - - - -
reporting period
1 880 4 523 5 508 7 744 1 782 4 948 6 752 9 420 1 893 5 239 7 155 9 978 2 009 5 545 7 578 10 565
Minority share capital - - - - - - - - - - - - - - -
Long-term liabilities 21 18 17 32 32 32 32 32 32 32 32 32 32 32 32 32
Other financial liabilities - - - - - - - - - - - - - - - -
Deferred income tax liabilities - - - - - - - - - - - - - - - -
5 5 5 2 2 2 2 2 2 2 2 2 2 2 2 2
Other provision - - - - - - - - - - - - - - - -
Other financial liabilities - - - - - - - - - - - - - - - -
Trade liabilities 6 699 12 140 7 520 8 896 7 001 12 688 7 859 9 297 7 317 13 260 8 214 9 717 7 647 13 858 8 584 10 155
tax
433 829 15 263 263 263 263 263 263 263 263 263 263 263 263 263
Other liabilities 1 769 3 800 2 271 1 763 1 388 2 515 1 558 1 843 1 450 2 628 1 628 1 926 1 516 2 747 1 701 2 013
Deferred revenues 28 2 716 3 990 3 353 3 672 3 512 3 592 3 552 3 572 3 562 3 567 3 565 3 566 3 565 3 565 3 565
similar benefits
- 79 - 88 88 88 88 88 88 88 88 88 88 88 88 88
Other provision - 4 - 177 177 177 177 177 177 177 177 177 177 177 177 177
- - - - - - - - - - - - - - - -

18
Appendix 7: Statement of Comprehensive Income (GOG.com)
Sales revenues 14 172 35 390 49 703 67 738 14 881 39 050 54 078 74 905 15 625 41 002 56 782 78 650 16 406 43 052 59 621 82 582
products
- - - - - - - - - - - - - - - -
and materials
- - - - - - - - - - - - - - - -
sold
9 124 23 237 32 385 44 288 9 821 25 773 35 692 49 437 10 312 27 061 37 476 51 909 10 828 28 414 39 350 54 504
sold
9 124 23 237 32 385 44 288 9 821 25 773 35 692 49 437 10 312 27 061 37 476 51 909 10 828 28 414 39 350 54 504
sold
- - - - - - - - - - - - - - - -
Other operating revenues - - - - - - - - - - - - - - - -
Selling costs 2 668 6 262 9 406 12 505 2 557 6 711 9 293 12 872 2 685 7 046 9 758 13 516 2 819 7 398 10 246 14 192
costs
331 804 1 442 1 872 430 860 1 290 1 720 430 860 1 290 1 720 430 860 1 290 1 720
Other operating expenses - - - - - - - - - - - - - - - -
Operating profit (loss) 2 049 5 087 6 470 9 073 2 072 5 706 7 803 10 875 2 197 6 035 8 258 11 505 2 329 6 379 8 735 12 166
Financial revenues 108 118 36 90 54 108 162 216 54 108 162 216 54 108 162 216
Financial expenses 3 15 160 276 116 233 349 465 116 233 349 465 116 233 349 465
Share of profit of ass. acc. for
using the eq. meth.
- - - - - - - - - - - - - - - -
Profit (loss) before taxation 2 154 5 190 6 346 8 886 2 010 5 581 7 616 10 626 2 135 5 910 8 071 11 255 2 266 6 254 8 548 11 917
Income tax 279 676 854 1 142 228 633 864 1 206 242 670 916 1 277 257 710 970 1 352
Net profit/loss associates - - - - - - - - - - - - - - - -
operations
1 875 4 514 5 492 7 744 1 782 4 948 6 752 9 420 1 893 5 239 7 155 9 978 2 009 5 545 7 578 10 565

19
Appendix 8. Statement of financial position (Invest (Brand))
Fixed assets 111 678 92 492 93 229 93 072 93 079 93 086 93 093 93 100 93 107 93 115 93 122 93 130 93 138 93 146 93 154 93 163
Tangible assets 5 973 1 078 1 391 1 235 1 235 1 235 1 235 1 235 1 235 1 235 1 235 1 235 1 235 1 235 1 235 1 235
Goodwill - - - - - - - - - - - - - - - -
Investments in subsidiaries 47 251 32 917 32 917 32 917 32 917 32 917 32 917 32 917 32 917 32 917 32 917 32 917 32 917 32 917 32 917 32 917
from consolidation
- - - - - - - - - - - - - - - -
sale (long-term)
- - - - - - - - - - - - - - - -
Current assets 11 278 20 234 26 763 26 687 30 417 30 009 29 711 29 305 30 486 30 093 29 702 29 341 30 639 30 358 30 064 29 687
Inventories - - - - - - - - - - - - - - - -
Trade receivables 58 44 138 166 166 166 166 166 166 166 166 166 166 166 166 166
income tax
1 - - - - - - - - - - - - - - -
Other receivables 1 818 611 19 167 8 245 8 256 8 232 8 029 7 718 7 453 6 949 7 076 7 220 7 207 7 537 7 977 8 543
sale (short-term)
- - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - -
Other financial assets 808 817 2 730 2 744 2 757 2 771 2 785 2 799 2 813 2 827 2 841 2 855 2 870 2 884 2 898 2 913
Prepaid expenses 91 91 56 79 80 81 77 74 73 76 75 73 74 77 76 75
Assets classified as held for sale - - - - - - - - - - - - - - - -
TOTAL ASSETS 122 956 112 726 119 992 119 760 123 496 123 095 122 804 122 405 123 593 123 207 122 825 122 471 123 777 123 504 123 219 122 850

20
Equity 121 232 109 166 117 062 116 665 120 298 119 900 119 503 119 106 120 298 119 900 119 503 119 106 120 298 119 900 119 503 119 106
Equity attributable to shareholders
of the Parent Company
121 232 109 166 117 062 116 665 120 298 119 900 119 503 119 106 120 298 119 900 119 503 119 106 120 298 119 900 119 503 119 106
Share capital 94 955 94 955 94 955 94 955 94 955 94 955 94 955 94 955 94 955 94 955 94 955 94 955 94 955 94 955 94 955 94 955
110 936 110 936 110 936 110 936 110 936 110 936 110 936 110 936 110 936 110 936 110 936 110 936 110 936 110 936 110 936 110 936
Own shares - - - - - - - - - - - - - - - -
Other reserve capital 1 139 1 396 1 624 1 624 1 624 1 624 1 624 1 624 1 624 1 624 1 624 1 624 1 624 1 624 1 624 1 624
Exchange rate differences - - - - - - - - - - - - - - - -
reporting period
1 022 11 301 3 633 4 030 397 795 1 192 1 589 397 795 1 192 1 589 397 795 1 192 1 589
Minority share capital - - - - - - - - - - - - - - -
Long-term liabilities 954 1 369 1 676 1 327 1 371 1 418 1 467 1 518 1 572 1 629 1 689 1 751 1 817 1 886 1 958 2 034
Deferred income tax liabilities 494 670 847 889 934 981 1 030 1 081 1 135 1 192 1 251 1 314 1 380 1 449 1 521 1 597
17 17 17 13 13 13 13 13 13 13 13 13 13 13 13 13
Other provision - - - - - - - - - - - - - - - -
Short-term creditors 770 2 191 1 254 1 704 1 791 1 715 1 825 1 721 1 577 1 417 1 164 858 840 1 490 1 519 1 460
Credits and loans 4 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Trade liabilities 146 265 112 238 238 238 238 238 238 238 238 238 238 238 238 238
tax
- - - - - - - - - - - - - - - -
Other liabilities 416 1 592 688 951 1 039 956 1 061 953 815 657 398 94 81 746 772 708
similar benefits
76 85 102 67 66 67 66 66 67 74 73 72 69 69 69 69
Other provision 41 32 1 94 95 100 107 112 103 96 101 100 99 83 86 90
- - - - - - - - - - - - - - - -

21
Appendix 9. Statement of Comprehensive Income (Invest)
Sales revenues 1 720 3 317 4 711 6 294 1 583 3 165 4 748 6 330 1 583 3 165 4 748 6 330 1 583 3 165 4 748 6 330
products
- - - - - - - - - - - - - - - -
and materials
- - - - - - - - - - - - - - - -
materials sold
207 424 620 785 165 330 496 661 165 330 496 661 165 330 496 661
sold
207 424 620 785 165 330 496 661 165 330 496 661 165 330 496 661
sold
- - - - - - - - - - - - - - - -
Other operating revenues 1 195 2 574 2 658 2 838 180 360 540 720 180 360 540 720 180 360 540 720
Selling costs 452 938 1 267 1 651 384 768 1 152 1 536 384 768 1 152 1 536 384 768 1 152 1 536
costs
1 368 2 968 4 410 5 893 1 483 2 966 4 449 5 931 1 483 2 966 4 449 5 931 1 483 2 966 4 449 5 931
Other operating expenses 40 145 167 440 273 545 818 1 090 273 545 818 1 090 273 545 818 1 090
Operating profit (loss) 848 1 416 905 363 -542 -1 084 -1 626 -2 169 -542 -1 084 -1 626 -2 169 -542 -1 084 -1 626 -2 169
Financial revenues 365 444 9 104 9 299 195 389 584 779 195 389 584 779 195 389 584 779
Financial expenses 5 12 835 13 043 13 144 101 201 302 403 101 201 302 403 101 201 302 403
Share of profit of ass. acc. for
using the eq. meth.
- - - - - - - - - - - - - - - -
Profit (loss) before taxation 1 208 -10 975 -3 034 -3 482 -448 -896 -1 345 -1 793 -448 -896 -1 345 -1 793 -448 -896 -1 345 -1 793
Income tax 186 326 599 548 -51 -102 -153 -203 -51 -102 -153 -203 -51 -102 -153 -203
Net profit/loss associates - - - - - - - - - - - - - - - -
operations
1 022 -11 301 -3 633 -4 030 -397 -795 -1 192 -1 589 -397 -795 -1 192 -1 589 -397 -795 -1 192 -1 589

22
Appendix 12. DCF assumptions
1. CAPM
Table 1.
CAPM
Risk free rate rf 3% 11 Jan 2015 10-year Polish Government Bond
Coefficient β 1.20 Computed by team. We have taken as a benchmark MSCI World Index, which includes a collection of
stocks of all the developed markets in the world as appropriate for the market on which the Group
operates.
Market risk premium rm – rf 6.05% Computed by team as an average market risk of all 23 countries included in MSCI World Index. Market
risks from texts A. Damodaran
Cost of equity r 10.3% r=rf+β(rm-rf)
Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html, www.obligacjeskarbowe.pl
Table 2.
Country RISK premium Weight Country Risk premium Weight
USA 5.75% 58.38% 3.36% Israel 7% 1.06% 0.07%
Japan 7% 7.98% 0.56% Russia 8.60% 1.06% 0.09%
United
Kingdom
6% 7.93% 0.48% Netherlands 5.75% 1.06% 0.06%
Canada 5.75% 3.98% 0.23% New Zealand 5.75% 1.06% 0.06%
France 6.50% 3.65% 0.24% Norway 5.75% 1.06% 0.06%
Belgium 6.50% 1.06% 0.07% Portugal 9.50% 1.06% 0.10%
Austria 6% 1.06% 0.06% Singapore 5.75% 1.06% 0.06%
Finland 5.75% 1.06% 0.06% Spain 8% 1.06% 0.09%
Denmark 5.75% 1.06% 0.06% Sweden 5.75% 1.06% 0.06%
Hong kong 6.50% 1.06% 0.07% Switzerland 5.75% 1.06% 0.06%
Ireland 8.00% 1.06% 0.09% Germany 5.75% 1.06% 0.06%
Weighted average 6.05%
Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html,
www.msci.com
Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html, www.msci.com
2. WACC
Since there is almost 0% (0.016%) debt in the structure of capital value in further calculations we assume that: WACC = Cost of capital
y = 1.1079x + 0.0089
R² = 0.2214
-30%
-20%
-10%
0%
10%
20%
30%
40%
-12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8%
WeeklyreturnCDR
Weekly return MSCI
Figure 1. Beta estimation

23
Table 4
Table 5
Appendix 13. Forecasting of sales revenues of the Studio
1. According to Table 1 we can see that production capacity is about 20% per quarter, so we can predict how many games will be
produced before the release of W3. Using the proportion of production in progress in quarter before release of The Witcher 2 (“W2”)
on Xbox360 to quarter before W3 (Table 2) we estimate sales revenues of W3 in Q2.2015 at the level of almost PLN 92.5 million.
Table 1
Table 2
2. Next attempt was to compare liabilities which consist of advances from distributors. We analyze quarter before W2 on Xbox 360
release and quarter before W3 release. Using this proportion we get the amount of almost PLN 130 million of sales revenues.
Table 3.
3. We can compare The Witcher to Elder Scrolls. According to the data presented in Figure 1 we can foresee the total amount of units
of W3 sold about 13.9 million in first three years. Of course Elder Scrolls is much bigger production than The Witcher so we have to
deal with this number carefully.
Figure 1.
Source: Team Estimates, VGChartz, Statisticbrain.com, Elderscrolls.com
Data in the table on the left lets us predict the volume of sales The
Witcher 3 in second quarter 2015 with an amount of 4.4 million of
units, which would give about PLN 450 million of revenue.
Method Proportion of production Proportion of advances Comparison to Skyrim
Revenues in Q2.2015 [PLN thousand] 92 500 130 000 450 000
Wages 33 % 33% 33%
Average result 222 000
Since there are moderate reviews and comments about The Witcher Board Game we do not add any value from this investment. We do the
same with The Witcher Battle Arena released on Android’s and iOS, which by now was installed more than 100 thousands time, but has low
rates (3.5/6 on play.google.com).
Games development Q1.2014 Q2.2014 Q3.2014 Q4.2014F Q1.2015F
Production in progress [PLN thousand] 49 031 59 395 71 393 85 671 102 865
Games development Q1.2012 Q1.2015F
Production in progress [PLN thousand] 25 525 102 865
Sales revenues quarter later [PLN thousand] 22 948 92 481
Games development Q1.2012 Q1.2015F
Advances [PLN thousand] 11 645 65 878
Sales revenues quarter later [PLN thousand] 22 948 129 821
Game Percentage of units sold in 1st month
Witcher 1 23.08 %
Witcher 2 PC 28.47 %
Witcher 2 X360 27.15 %
Elder Scrolls V 50.00 %
AVG 32.18 %
0
5
10
15
20
25
W1 ES III W2 ES IV W3 ES V
Millionsofunits
Source: Team Estimates, VGChartz, Statisticbrain.com,

24
Our next assumption is that the second game - Cyberpunk 2077 will be released in 2017 and will have the same scale like The Witcher 3. It is
very possible because the book is very popular. Moreover teaser released on Youtube.com had by now more than 7 million views, while the
Company assumed that they will make this game, if a number of views will cross one million.
We can’t also predict how will look the situation about currency prices. That is why we assume that will this changes will not influence at the
Company and averagely will neither harm and help the Company.
Appendix 14. Methodology for Selecting Peers
Local comparables
On WSE the only company dedicated to creating and publishing video games except CD Projekt S.A. is CI Games. However, the market
capitalization of this company is low in comparison to the Company, which is why this company is not a good candidate to compare.
Company Market Capitalization (PLN thousand)
CD Projekt 1 523 948
CI Games 112 016
Source: Warsaw Stock Exchange Website – www.gpw.pl
Region comparables
A similar situation occurs globally. Companies with market capitalization similar to the Company are usually private, therefore the choice of
comparison group was mainly based on the selection of companies whose main source of income is the creation and distribution of computer
and video games. These are Activision Blizzard Inc. (USA), Electronic Arts Inc. (USA), Take-Two Interactive Software (USA), Square Enix (Japan),
Konami Corp. (Japan), CapCom Co. Ltd. (Japan), Namco Bandai (Japan), and Ubisoft Entartainment (France).
Source: Team analysis based on historic TTM data
Comparable P/BV P/EBIT P/S P/E EV/EBITDA EV/EBIT EV/S
ACTIVISION BLIZZARD INC 2.2 14.4 3.2 23.4 11.1 14.4 3.2
ELECTRONIC ARTS INC 5.7 35.0 3.7 44.1 22.9 35.0 3.7
UBISOFT ENTERTAINMENT 2.0 n.d. 1.7 n.d. 5.3 n.d. 1.7
SQUARE ENIX 2.4 22.4 1.9 31.3 22.7 22.4 1.9
KONAMI CORP 1.3 31.1 1.4 57.6 12.7 31.1 1.4
BANDAI NAMCO 1.8 10.5 1.0 19.5 11.2 10.5 1.0
CAPCOM CO LTD 1.8 17.3 1.7 70.0 19.5 17.3 1.7
TAKE-TWO INTERACTIVE SOFTWARE 3.3 5.0 1.1 8.9 3.5 5.0 1.1

25
Appendix 15. Market multiples method and comparison to 2014-2017 forecast
We are comparing a minority shareholding of listed company to other listed companies therefore no liquidity or control discount or premium
was applied. Current research shows that the size premium is no longer present in valuations.
Comparable valuation Global Peers - 2014F EOY results
P/BV P/EBIT P/S P/E EV/EBITDA EV/EBIT EV/S
ACTIVISION BLIZZARD INC 2.2 14.4 3.2 23.4 11.1 14.4 3.2
ELECTRONIC ARTS INC 5.7 35.0 3.7 44.1 22.9 35.0 3.7
UBISOFT ENTERTAINMENT 2.0 n.d. 1.7 n.d. 5.3 n.d. 1.7
SQUARE ENIX 2.4 22.4 1.9 31.3 22.7 22.4 1.9
KONAMI CORP 1.3 31.1 1.4 57.6 12.7 31.1 1.4
BANDAI NAMCO 1.8 10.5 1.0 19.5 11.2 10.5 1.0
CAPCOM CO LTD 1.8 17.3 1.7 70.0 19.5 17.3 1.7
TAKE-TWO INTERACTIVE SOFTWARE 3.3 5.0 1.1 8.9 3.5 5.0 1.1
Median 2.1 17.3 1.7 31.3 12.0 17.3 1.7
BV EBIT S E EBITDA EBIT S
Company (2014 EOY forecast) 160 937 3 748 86 725 5 081 7 289 3 748 86 725
Comparative valuation 342 314 64 676 146 346 158 983 87 451 64 676 146 346
PLN USD
Median 100% value of equity 146 346 39 876
Median 2.1 17.3 1.7 31.3 12.0 17.3 1.7
Comparative valuation 717 146 3 657 113 896 475 5 794 581 2 594 004 3 657 113 896 475
PLN USD
Median 100% value of equity 2 594 004 706 813
Discounted 100% value of equity 2 352 704 641 064
Median 2.1 17.3 1.7 31.3 12.0 17.3 1.7
Comparative valuation 525 339 1 232 579 372 886 1 982 398 918 461 1 232 579 372 886
PLN USD
Median 100% value of equity 918 461 250 262
Discounted 100% value of equity 755 534 205 868

26
Median 2.1 17.3 1.7 31.3 12.0 17.3 1.7
Comparative valuation 833 782 4 073 724 995 207 6 450 490 2 905 458 4 073 724 995 207
PLN USD
Median 100% value of equity 2 905 458 791 678
Discounted 100% value of equity 2 167 727 590 661
Summary of valuations
PLN USD
DCF Valuation (Perpetuity growth model) 1 862 247 507 424
DCF Valuation (Terminal multiple method) 1 685 564 459 282
Comparative valuation Global Peers 2014F 146 346 39 876
Discounted comparative valuation Global Peers 2015F 2 352 704 641 064
Discounted comparative valuation Global Peers 2016F 755 534 205 868
DCF average 1 773 906 483 353
Comparables average 1 355 578 369 367
Overall average: 50% DCF, 50% Comparables 1 564 742 426 360
Source: Team analysis

27
Appendix 16. DuPont analysis.
17.15% 10.48% 5.86%
34.86% 28.67% 34.96%
80.85% 65.33% 35.66%
155.08% 70.18% 149.54%
Net income/Sales Sales/Asset
13.86% 6.85% 2.09%
54.07% 20.12% 52.28%
133.90% 130.03% 151.11%
101.60% 127.49% 100.61%
ROA Asset/Equity
18.56% 8.90% 3.16%
54.93% 25.65% 52.59%
ROE
2012 2013 2014
2015 2016 2017
Legend
99.72% 115.57% 260.16%
100.67% 101.98% 100.60%
99.43% 86.68% 52.12%
86.82% 86.99% 86.82%
EBT/EBIT Net income/EBT
28 125 14 900 5 081
185 206 63 361 206 170
28 367 14 874 3 748
211 907 71 420 236 047
Net income
EBIT

28
Appendix 17. Porter’s Five Forces Analysis of CD Projekt RED
Threat of New Entrants [Low]
1) high absolute cost
2) existence of economies of scale
3) high equity and customer loyalty to established brands
4) high costs for research and development
5) high industry profitability
Threat of Substitute Products or Services [Average]
1) high buyer propensity to substitute
2) high perceived level of product differentiation
3) ease of substitution
4) low buyer switching costs
5) fast quality depreciation
Bargaining Power of Buyers [Average]
1) independence upon existing channels of distribution
2) low buyers’ switching costs relative to firm switching costs
3) low buyers’ threat of backward integration
4) high availability of existing substitute products
5) opinion on social networks
Bargaining Power of Suppliers [Insignificant]
1) high supplier switching costs relative to firm switching costs
2) low employee solidarity
3) specialized labour force required
4) low impact of inputs on differentiation
5) presence of substitute inputs
Intensity of Competitive Rivalry [High]
1) high level of advertising expense
2) economies of scale
3) high product differentiation
4) powerful competitive strategy
0
1
2
3
4
5
Threath of
New Entrants
Threat of
Substitute
Products
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Competition
in the
Industry
Legend
0 No threat to the business
1 Insignificant threat to the business
2 Moderate threat to the business
3 Significant threat to the business
4 High threat to the business
5 Very high threat to the business

29
Appendix 18. Porter’s Five Forces Analysis of GOG Ltd.
Threat of New Entrants [Insignificant]
1) building a distribution channel
3) high product differentiation
4) very high equity and customer loyalty to established brands
5) high industry profitability
6) high costs for research and development
Threat of Substitute Products or Services [Average]
1) very low buyers’ propensity to substitute
2) relative price performance of substitute
3) very low buyer switching costs
4) very large number of substitute products available in the market
5) ease of substitution
Bargaining Power of Buyers [Low]
1) widely dispersed buyers
2) differential advantage
3) low buyers’ force to down prices
4) vast availability of buyers’ information
Bargaining Power of Suppliers [Average]
1) no presence of substitute inputs
2) low employee solidarity
3) high supplier competition
4) specialized labour force required
Intensity of Competitive Rivalry [High]
2) relatively large competitors
3) moderate level of advertising expense
4) sustainable competition through innovation
0
1
2
3
4
5
Threath of
New
Entrants
Threat of
Substitute
Products
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Competition
in the
Industry
Legend
0 No threat to the business
1 Insignificant threat to the business
2 Moderate threat to the business
3 Significant threat to the business
4 High threat to the business
5 Very high threat to the business

30
Appendix 19. Impact and probability of risk - matrix.
Unsuccessful
product
launches
Changes in
general
macroeconomic
situation
Exchange
rate risk
Liquidity risk
Loss of
important
employees
Stronger
competition
Outdated or
new
platforms
Consolidation
of companies
IT and
communication
system failure
Law
regulations
Game defects
Wrong
estimation
of future
sales
Delays in
release
dates of
products
Increase in
materials and
components
costs
Loss of
important
suppliers
Intellectual
property
LowMediumHigh
ImpactofRisk
Low Medium High
Probability of occurence
Legend
Strategic Risk
Legal Risk
Market Risk
Operational Risk

31
Appendix 20. Financial Analysis
RATIOS 2012 2013 2014 2015 2016 2017
Profitability
EBITDA margin 18.89% 12.67% 5.52% 40.70% 34.64% 41.06%
Operating profit margin 17.29% 10.46% 2.84% 39,89% 32.32% 40.02%
Core operating margin
Net profit margin 17.59% 17.15% 10.48% 3.85% 34.86% 28.67%
Return on assets 13.86% 6.85% 2.09% 54.07% 20.12% 52.28%
Return on equity 18.56% 8.90% 3.16% 54.93% 25.65% 52.59%
Liquidity
Current ratio 2.48 2.72 1.87 9.92 2.59 11.66
Quick ratio 1.72 1.57 0.77 8.33 1.52 10.05
Cash ratio 0.61 0.88 0.45 7.30 1.13 8.70
Activity
Cash Conversion Cycle 63 122 391 110 200 99
Total asset turnover 0.84 0.68 0.57 1.81 0.67 1.66
Fixed asset turnover 1.77 1.50 1.42 5.68 2.26 5.67
Appendix 21. Worldwide revenue split.
Source: Company Data

32
Appendix 22. DCF Valuation
FCFE valuation [PLN thousand] 2014 2015 2016 2017
EBIT 3 748 211 907 71 420 236 047
Tax 1 638 28 117 9 475 31 293
EBIT after tax 2 110 183 791 61 946 204 755
- Interest -12 -3 -3 -3
+ Net borrowing 7 4 4 4
+ Depreciation 3 542 4 304 5 134 6 124
- CAPEX 6 121 8 093 9 836 11 956
- Change in receivables -36 925 49 216 -49 216 49 216
- Change in inventory -1 333 1 311 -6 126 -1 544
+ Change in liabilities -10 517 -2 436 4 990 31 804
FCFE -37 008 244 279 26 565 302 311
Cost of equity 10.3% 10.3% 10.3% 10.3%
Discount factor 0.91 0.82 0.75 0.68
DCF -33 565 200 946 19 820 204 569
DCF total 391 770
Terminal growth method [PLN thousand]
Terminal growth rate (inflation target) 2.5%
PV of residual value 1 470 477
Value of 100% equity PLN 1 862 247
Value of 100 % equity USD 507 424
Terminal EBITDA multiple [PLN thousand] 12.0 (Longterm based in Global Peer
Group)
PV of residual value 1 293 794
Value of 100% equity PLN 1 685 564
Value of 100% equity USD 459 282
Multiples 2014 2015 2016 2017
Summary of valuations PLN USD
DCF Valuation (Perpetuity growth model) 1 862 247 507 424
DCF Valuation (Terminal multiple method) 1 685 564 459 282
Comparative valuation Global Peers 2014F 146 346 39 876
Discounted comparative valuation Global Peers 2016F 755 534 205 868
DCF average 1 773 906 483 353
Comparables average 1 355 578 369 367
Overall average: 50% DCF, 50% Comparables 1 564 742 426 360
Source: Team computations

33
Appendix 23. References
iIHS Technology Website
iiCD Project, 2014 3rd Quarter Corporate Report
iii Newzoo, 2014 Global Games Market Report
iv Newzoo, 2014 Global Games Market Report
v The NPD Group/Retail Tracking Service
vi Metacritic Website, Team estimates
vii CD Projekt
viii http://www.gamespot.com
ix Newzoo, 2014 Global Games Market Report
x http://www.canadianbusiness.com/technology-news/rise-of-mobile-gaming-surprises-big-video-game-developers/
xi
http://www.gadgetreview.com/2013/11/steam-vs-origin-vs-uplay-comparison, Team estimates
xii
http://techland.time.com/2013/05/06/50-best-websites-2013/
xiii
The NPD Group/Games Market Dynamics: U.S., IHS Technology/Worldwide PC game download-to-own market forecast
xiv
https://technology.ihs.com/445938/
xv
http://www.pcgamer.com/gog-release-witcher-2-sales-stats-steam-dominates-all-competitors-combined/
xvi
http://www.gamasutra.com/view/feature/186940/Defenders_Quest_By_the_Numbers_Part_2.php
xvii
http://www.pcgamer.com/gog-release-witcher-2-sales-stats-steam-dominates-all-competitors-combined/, http://www.gamasutra.com/view/feature/186940/Defenders_Quest_By_the_Numbers_Part_2.php

34
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might
bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject
company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the
author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or
completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This
information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report
should not be considered to be a recommendation by any individual affiliated with CFA Poland, CFA Institute or the CFA Institute
Research Challenge with regard to this company’s stock.
CFA Institute Research Challenge

Cfa agh

Recommended

Recommended

More Related Content

Viewers also liked

Viewers also liked (13)

Similar to Cfa agh

Similar to Cfa agh (20)

Recently uploaded

Recently uploaded (20)

Cfa agh