CFA Institute 2015

CFA Institute Research Challenge
hosted by
Local Challenge CFA Society of Poland

J
[IT, Video Game Development, Digital Distribution]
Team J Student Research

This report is published for educational purposes only by student competing in CFA Institute Research Challenge
Date 12/02/15
Current Price PLN 16.16
Target price PLN 16.27 (+0.3%)

Ticker: (Warsaw SE: CDR)
Recommendation: Hold
Main revenues growth drivers:

Market profile
On-going triple-A games

26-week price range (PLN)
16.27
releases
Average
daily
volume
(last
3M)
128.2
Entrance into the new

domain: mobile phone
As % of shares outstanding
0.13%
games industry
Free float
45.1%
Steady growth in sales via

P/BV
9.38
GOG.com platform. The
business is driven by a high
Shares outstanding (in mn)
94.95
level
of
heterogenous
Market Cap (PLN bn)
1.54
substitutes. The success of
P/E
350.0
the CDP releases relies on
the mix of high quality,
Earnings per share (in PLN)
0.046
meeting
customers
ROE
(2014E)
1.71%
requirements,
and
adjusting to their hardware;
GOG which will start selling triple-A games and will introduce its new platform
A very good reputation of The Witcher saga.

We estimate that the company will have high ability to generate cash and will be selffinanced. Currently, the success of the company is determined by a very good reception of
the W2. We do not believe that the company will be capable of sustaining its very dynamic
growth in the future and our assumption is that the CDP will suffer from a decrease of its
CAGR.;
One of CD Projekt's business domains will be sold in 2016 for nearly PLN 20mn (CDP.pl).
According to our calculation, the sales of The Witcher 3 and Cyberpunk 2077 will reach 7mn
and 6.5 mn, respectively.
We estimate that 2016 is going to be the best year in terms of generating cash flows for
the company due to the W3 release.
The main factors affecting the CDPs future is currency risk and perception of gamers.
Table 1
20
11/03/2014
The postponement of
The W3's release date
18
14
1/03/2011
The publication of an
unfavourable quarterly
financial report
20/04/2011
The bankruptcy
of the daughter
company
Optibox Sp. z
o.o.
The CD Projekt stock price
12
10
16/11/2010
The news about The
W2's release date
2/08/2011
The Optimus
S.A.
transformation
into CD
Projekt Red
S.A.
12
10
5/03/2013
The disclosure
about negotiations
with PC Factory
S.A.
27/03/2012
The GOG.com released
issues
8
19/12/2014
The news about the
CD Projekt Brands
S.A. shares' disposal
8
4
6
4
2
0
Volume
(in mn)
16
26/11/2014
The CDP.pl
shares' disposal
5/02/2013
The announcement about The W3's
releasing
Source: The company's data, The WSE's website
Figure 1 Structure of CD Projekt Capital Group
Business Description
CD Projekt Capital Group is a Polish company which operates on the global digital entertainment
market and is especially known for its video games development department.
It was established in 1994, but the contemporary form of the business was adopted due to
association with Optimus enterprise. In September 2011 the company has changed its name from
Optimus S.A. to CD Projekt Red S.A. The brand became internationally recognized among investors
in 2002 thanks to initial public offering at the Warsaw Stock Exchange. The main business domains
are:
GOG Ltd.
GOG Poland
Sp. z o.o.
CD Projekt
S.A.
Brand Projekt
Sp. z o.o.
CD Projekt Inc.
CD Projekt
Brand S.A.
The group is cooperating with 17 worldwide sales partners, what gives it the opportunity to physically
distribute on 109 markets (see the Figure 2). The scope of sales is enhanced mainly by distribution
through digital platforms such as Steam, PlayStation Network, and Xbox One Marketplace.
Source: The company data.

Figure 2 CD Projekts sales
The Witcher 3:Wild Hunt, 2015
partners
worldwide,

Figure 3 Gross profit per quarter (in mln)
Global digital
distribution of
games
30 000
25 000
Distribution and
publishing in
Poland
20 000
Games
development
15 000
10 000
Other activities
5 000
0
Q3 2014
Q2 2014
Q1 2014
Q4 2013
Q3 2013
Q2 2013
Q1 2013
Q4 2012
Q3 2012
Q2 2012
Q1 2012
-5 000
Development and distribution of video games around the world by CD Projekt Red studio,
Digital distribution of computer games via GOG.com platform,
Delivery of packaged video games, movies, audiobooks, ebooks, and electronic devices
by CDP.pl operating in the Polish market.
Consolidation
eliminations

Figure 4 The structure of shareholders
Marcin Iwiski
Micha Kiciski
PKO TFI S.A.
MetLife PTE S.A.
Piotr Nielubowicz
Aviva OFE Aviva
BZ WBK
Adam Kiciski
Free float
Source: The company and the WSE data.
The companys main product is an action-RPG The Witcher saga based on Andrzej Sapkowskis
novels. The consumers perception of the market position of the game is going to be strengthened
by titles like Cyberpunk 2077 and The Witcher Battle Arena. Over 200 high-class specialists have
got involved in the process of creating adventures of Geralt of Rivia. Not only graphics, programmers
and designers, but also musicians and screenwriters have been engaged in the process of game
developing. The Witcher saga total sales have reached about 8 million copies worldwide (until the
end of 2014). According to pre-order data estimated by VGChartz, almost 240k gamers (a colloquial
word for a player) from the U.S. have purchased the newest title (The Witcher 3: Wild Hunt) via 3
game platforms (PS4, XboxOne, and PC). Game has won over 170 international awards before its
release, including the biggest global public-voted gaming award - Golden Joystick Award in "Most
Wanted" category.
On average, 39% of CD Projekts total gross profit (as presented in Figure 3) is generated by CD
Projekt Red developing video games. Moreover, gross profit from sales of games via GOG.com
platform, distribution and publishing in Poland (CDP.pl) constitutes respectively 35% and 30% of the
total profit. The company, on average, makes a gross profit on sales in the amount of PLN 16.15mn
per quarter. [the above calculation was prepared on the basis of the last 11 quarters]
The companys strategy for the upcoming years can be summed up in the following points:
Release of new products - CD Projekt is still working on the two leading-edge releases:
The Witcher 3: Wild Hunt and also Cyberpunk 2077: these games are high-budget
products, their developers primary focus lies in the highest quality of their products (tripleA video games), they employ highly advanced technologies to achieve that aim,
Maintenance of the customers loyalty - this strategic objective is going to be achieved

by supporting their franchise: CD Projekt plans to release two games based on one of their
core franchises; although such products are mid-range (circa 20 hours of gameplay), they
will also be characterized by the highest quality,
Development of innovation - as a digital distribution platform, the company has

constantly invested in R&D projects to develop platforms facilities and also strengthen its
position in the global market,
Commercialization of proprietary technology - starting to license the game

development technology, the REDengine, to third-party developers: the newest version of
this multiplatform engine is powering their major releases,
Entrance into the new domain - the company assumes that digital and mobile
entertainment market is going to rise, so that they are creating new products for users of
mobile devices, e.g. The Witcher: Battle Arena.
The structure of shareholders by the amount of shares and by the amount of votes at AGM are
coincident. During the years 2002-2014, there were several changes in CD Projekt shareholders
structure. Currently, there are three institutional shareholders (each one holding more than 5% of
shares): PKO TFI S.A. (9.48%), MetLife PTE S.A. (5.27%), Aviva OFE Aviva BZ WBK (5.20%). The
rest of Companys equity belongs to the treaty of CD Projekt Red shareholders (35.81%) and to
individuals such as Free float (44.24%). The majority of votes belongs to business founders and
Board Members and is split as follows: Marcin Iwiski (13.28%), Micha Kiciski (12.94%), Piotr
Nielubowicz (6.30%), Adam Kiciski (3.29%).
CD Projekts management is represented by professional and highly devoted people. CD Projekt
originated as a small commercial business. Then, after the merger with Optimus, the company
evolved into a leading video games developer in the Polish market. Its franchise has started to be
internationally recognized after release of the first part of The Witcher saga.
Members of CD Projekt S.A. Board are: Adam Kiciski President and Joint CEO, Marcin Iwiski
co-founder and joint CEO, Piotr Nielubowicz CFO, Adam Badowski Studio Head, Micha
Nowakowski SVP Business Development.
The company, thanks to its effective management, has taken advantage of many opportunities
appearing on the developing Polish market as a grantee of European Regional Development Fund.
Since December 2007 it has managed to carry out six projects, amounting to about PLN 155.6k and
Figure 5 Projects co-financed by the European Regional

Development Fund, 2007-2013
EUR 100k. Currently, CD Projekt is conducting three more projects. One of them is dedicated to the
upcoming production The Witcher 3: Wild Hunt.
Corporate Governance
100%
As company listed on WSE CD Projekt is obligated to comply with corporate governance rules
stipulated in Good Practice of Companies Listed on Warsaw Stock Exchange. In connection with
that, CD Projekt published on its webpage a list of rules, which are not obeyed by it along with
explanation. Main factors having impact on our evaluation of the corporate governance were:
90%
80%
70%
60%
Members of a supervisory board - well-educated and experienced professionals: a

solicitor, a Ph.D. in technical sciences, a CFA charterholder, a tax advisor, an IT specialist,
lawyer,
Shareholder Rights - one-share-one-vote policy, minority shareholders are authorized to

revoke shareholders resolution, a special procedure for appointing members of the
supervisory board which allows minority shareholders to nominate candidates,
Audit and Oversight the whole board of directors creates audit committees, annual
reports are audited by PKF Consult a well-experienced consulting company;
Compensation - disclosed motivation plan for the board of directors, compensation and
benefit scheme was made public.
On the basis of our evaluation we claim that CD Projekt follows standards of best practice in
corporate governance. Lack of special committees the supporting supervisory board as well as the
corporate governance officer arises from facts that both the companys structure is not extensively
developed.
50%
40%
30%
20%
10%
0%
Project Value
EU financing
Industry Overview
It is estimated that global expenditures on entertainment and media are going to increase from USD
1.56tr in 2013 to USD 2.12tr in 2018, what equals to CAGR of 6.4%. Analysis of the global results
reveals that inhabitants of the Asia-Pacific region are worlds top spenders in entertainment and
media in comparison to inhabitants of other regions. It is worth noting that Central and Eastern
European market growth will be significantly faster than the growth of Western Europes markets,
although Latin America will be the fastest-growing region over the next four years, with annual growth
of 10.9%. Such expenses are strongly correlated with the global economic situation. In countries with
a stable economy, society citizens wealth has increases and thus spending on entertainment are
greater. However, thanks to the Internet and facilities provided by other technologies, people from
all over the world have more possibilities to fulfill their needs in the ways they really want. These
days lots of traditional methods of distribution have been replaced by digital
countertypes/equivalents. For more information, please see the Appendix 9.
Figure 6 Expected Global Game Market in 2014
Game industry revenue (in bn USD)
40
LATAM
35
30
NAM
25
20
APAC
15
MEA
10
5
EU
0
0
200
400
600
800
1 000
Gamers (in mln)
Source: NewZoo.
Figure 7 Total global spending on entertainment by
category
300
US $
millions
2012
2013
250
200
150
100
50
0
In-Home Video
Entertainment
Audio
Entertainment
Cinema
Out-of-Home
Consumer
Books
Video Games
Video games development

According to Global Games Market Report, worldwide game revenues amounted to USD 75.5 bn
in 2013, growing by approximately 14% as compared to the previous year. The top revenuegenerating region is APAC (Asia and Pacific), where the game industry generated 42% of total
income. Moreover, revenues of the global games market are expected to increase to USD 102.9bn
by 2017. By contrast, on the basis of data from Forecast: Video Game Ecosystem, revenues of the
game industry reached USD 93bn in 2013 (Appendix 10 and 13).
Sales of games for TV consoles as the most profitable market segment brought USD 23.6bn in
revenues (31% of total revenues in 2013). However, revenues from sales of PC/MAC games will
grow at 3.3% CAGR over the next six years, while the annual growth rate of games on TV will be
four times lower. The total number of video game consoles sold worldwide was about 42m in 2013,
twice less than in 2008. The best-selling TV console was Sonys Playstation 3, reaching the sales of
8.94m units. Please refer to the Appendix 7 and 8.
It is expected that the number of gamers exceeded 1.7bn in 2014. 47%, 19% and 13% of them
respectively come from regions such as Asia-Pacific, Europe and Middle East-Africa. The profile of
an average gamer could be as follows: age 31 and 14 years of video games playing. There are
almost as many women as men(who/that are)playing games. Games are the most frequently
purchased by 36 years old gamer on average. According to ESAs estimates of the best-selling video
games, nearly one in three gamers choose the action genre and also every fifth sold video game is
the shooter. Sales of RPGs constitute more than 12% of computer games and 7% of sold video
games units.
According to Newzoos data, the Polish games market generated revenues in the amount of USD
280mn and it consisted of 13.4mn players in 2014. They are mainly young men, pupils and students,
who spend an average of 21 hours a week playing games. Earnings of nearly half of working Polish
gamers amount to or exceed the national average salary. Moreover, the vast majority of Polish
gamers plays games via PC platform. The most popular game genres are shooters and role-playing
games (Appendix 14).
Source: McKinsey&Companys, Global Media Report

2014.
Figure 8 Global Games Market, 2013-2017
Casula Webgames
100%
MMO Games
80%
60%
(Mid)-Core
PC/Mac Games
40%
Mobil Phone
Games
20%
Tablet Games
Competitive Positioning
To understand CD Projekt Red Capital Group competitive position, we should take into
consideration the fact that the company consists of three businesses functioning in different market
environments. All of them have much in common, but we should remember to analyze each industry
very carefully. We want to determine the position of CD Projekt in comparison with its competitors,
its future position in the next years. To achieve accurate results, we have analyzed CD Projekt Red
Studio, cdp.pl, and GOG.com as compared them to both local and global leaders of their industries,
using analytical methods such as Porters five forces analysis and SWOT analysis.
Advantage of differentiation of buyers and products substitutes
0%
2013 2014 2015 2016 2017
Handheld Games
TV Console
Games
Source: NewZoo.
Figure 9 Share of total spending on console games
(USA)
DLC
65% 71% 68%
23%
Pre-owned
65% 66% 64%

80%
14%
9%
77% 75%
21%
27% 22%
20% 23%
12% 9%
Boxed
6%
16% 17%
15%
8% 12%
7% 8%
The modern world of entertainment, performing a part of media industry, has wide perspectives of
development, because both customers from developed and emerging markets spend much money
on its products: about USD 590mn in 2013, which is 5% growth as compared to 2012 (please refer
to Appendix 9). We have analyzed the gaming market from a global perspective.
The gaming market is characterized by huge bargaining power of mature and aware buyers with
specific expectations. What is more, an easy access to entertainment poses a considerable threat
to product substitution. To see more details, please refer to the Porters five forces analysis in
Appendix 11.
Potential buyers are gamers from all over the world and their number is estimated at nearly 2bn
people. The majority of purchasers of games are people who consciously choose products: they
are aware of their consumer needs and they also know how to meet them. Due to the strong growth
of the game industry, high product differentiation and unlimited access to substitutes, bargaining
power of buyers is constantly increasing.
Another characteristic which has a significant impact on the game industry is wide access to
substitute products. Traditional entertainment products such as movies, books, audio books,
board games are becoming slightly old-fashioned in the digital age, but they still have its
supporters. According to McKinsey&Companys Global Media Report 2014, participation of these
products in a total global spending on entertainment in 2013 is estimated at 35% compared to 12%
spent on video games (Appendix 9). Furthermore, there is clearly noticeable phenomenon in vogue
- healthy lifestyle. It encourages people to do sport instead of spending time in front of a computer
screen.
Progressive internationalization and increasing number of competitors

Source: NewZoo.
Figure 10 Porters five forces analysis for CD Projekt Red
Studio
Bargaining
Power of
Suppliers
Threats of
New
Entrants
5
4
3
2
1
0
Competitio
n in the
Industry
Source: The team estimate.
Many well-known international brands (like Warner Bros Interactive Entertainment, Namco Bandai
Games, Screenlife, 1C, Spike Chunsoft, and Megarom Interactive) have entered into cooperation
with CD Projekt, working together on releasing the newest game The Witcher 3: Wild Hunt.
Therefore, the operational risk of dependence on the only one publisher decreases.
Furthermore, the company does not have to be concerned about promotion and distribution,
because it has signed agreements with major local sales partners, what enables CD Projekt Red
Studio to distribute its products in 109 countries. Its main product will be physically available in North
and South America, Europe, Asia Continental and Pacific, Africa, and Australia. Thanks to that they
have guaranteed worldwide sales and improvement of their global performance.
Bargaining
Power of
Buyers
Threat of
Substitute
Products
The company is consistently implementing its strategy of internationalization. In accordance with

that strategy, it also has sold the majority of shares in cdp.pl, which is functioning only in the Polish
market. As a result of the transaction, the company downscaled its shares in cdp.pl to only 8.29%
in November 2014. Regardless all those steps cdp.pl still is going to publish The Witcher 3: Wild
Hunt on the Polish market, but its cooperation with the Capital Group depends on achieved bottom
line. These international operations yield positive results, but on the other hand they have a sideeffect in the form of an extremely fast increase of number of potential competitors.
One of the most important strategic problem is to choose the best date of the product release. It
certainly has a great influence on the future companys future profits. CD Projekt has changed the
date of the premiere a few times. That fact confirms us in our conclusions that main product of CD
Projekt Red Studio competes globally.
Mobile Game Segment

The mobile game segment is the fastest growing segment of market. We assume that over the
following years this trend will continue. In our view, over the next few years there will be following
key factors leading to rise in market value:
Developed markets increase of the share of paying players. According to Newzoo 2014, in twoyears time number of paying gamers will rise from 36% to 46% in Western Europe and the US
combined.
Developing markets rapid growth in number of smartphones and tablets will make global market
larger. It will be an essential trigger of rise in revenues.
Hardware innovation fierce competition among tablet and smartphone manufacturers will drive
constant and rapid growth in mobile technology, creating new opportunities for game developers
toattract more gamers and improve the quality of games.
Figure 11 Competitive positioning of GOG.com

Steam
GOG
Origin
Uplay
Foreign Currency
USD
USD,
EUR
Many
Many
Console Game
Limited
NO
NO
YES
Software
YES
NO
NO
NO
Movies
NO
YES
NO
NO
DRM
YES
NO
YES
YES
Demo
Many
No
Few
NO
For You
Special
Tools
NO
NO
NO
Optional
Voting+Customer
Review
YES
YES
NO
NO
Media Gallery
with Trailers
YES
YES
NO
NO
Forum for
Gamers
YES
YES
NO
NO
In our view, console game producers have a comparative advantage in mobile phone game
segment. According to survey the third main reason to start playing a game is, that a certain game
is a sequel of games that gamers used to play before. Loyal gamers who play on console are
likely to choose the same game on a mobile phone. Well-known console game brands attract
gamers. Gamers also stated that a knowledge of a publisher is one of the most important reasons
to choose a particular game. Number of games offered on mobile phones is extremely high due to
lower cost of production and other factors.
The Witcher Battle Arena. CD project is engaged in a process of developing first free-to-play
mobile games. We think that the company has a huge potential in this segment. We base our
opinion on following facts. Almost all world-renowned console game developers create games for
mobile devices. The console game producers have an advantage of well-known game brand
which can help them to obtain a high number of downloads. Currently, the company is gaining
experience and it's first games will probably not be very profitable. Although, we think that in long
term the company will make profit on mobile game segment.
Digital Distribution
Direct links to:
Discussions/
Guides/News/
Official WebPage
YES
NO
NO
NO
MMO Game
YES
NO
NO
NO
Only Own
Brands
NO
NO
YES
NO
Graphics of
Webpage (Our
Personal View)
Medium
Medium-
High-
High+

Figure 12 Best-Selling Video Games by Units Sold 2013
Strategy
Other
Games/Complications
Action
Adventure
Arcade
Casual
Children's Entertainment
Family Entertainment
Fighting
Flight
Racing
Role-Playing
Source: The 2014 Essential Facts About the Computer

and Video Game Industry, ESA.
Figure 13 Share of digital distribution and physical copies
in selected countries
Belgium
Netherlands
Italy
Spain
France
Germany
UK
Europe
US
41%
47%
39%
40%
44%
35%
42%
42%
58%
59%
53%
61%
60%
56%
65%
58%
58%
42%
Digital Distribution is growing at two digits number. According to Entertainment Software

Association and the NPD Group in 2013, digital distribution accounted for 53% of distribution in
comparison to only 29% in 2010. The growth is driven both by the rapid development of the game
market for mobile phone and smartphone as well as increase in popularity of digital distribution
among gamers.
Highly Concentration in Industry. Few market participants monopolize the segment of digital
distribution. Leader, Steam accounted for more than half of total revenue. Steam webpage offers
the great variety of functionality for the users and is not only a virtual shop but also a platform for
communication between gamers. Digital distribution provides a higher profit margin for Developers.
Retail distribution in more costly (physical production, transport cost, higher operating cost). Digital
distribution offers consumer unlimited access to a great variety of games for people around the
world. According to the CDP data, the net receipt from digital distribution of each The Witcher 3 will
be about twice higher than in retail distribution.
GOG is the leader in digital distribution of older classical games. Based on analysis of revenue
structure of GOG, we assume that classical games are mostly attractive for gamers who used to
play in those games (developed markets). Global market growth is driven by increase the number
of new gamers who could not have a sentiment for older games. Additionally the number of older
games, which could attract gamers is limited. We think that in the long run GOG could not grow only
by adding additional games to portfolio.
Based on the official presentation, we assume that GOG Galaxy will be offering new functionality.
Technology gap between Steam and GOG will become smaller. Advantage of GOG is base of loyal
customers who support DRM-free policy of platform but the mainstream publisher still relies on DRM
and do not want to cooperate with GOG because of lack of DRM protection. We assume GOG
Galaxy due to a new technology will be able to limit unauthorized copying without the necessity of
internet connection. GOG have loyal customers who support DRM-free policy of platform. We
assume that when new titles will be offered by GOG, DRM-free supporters could change platform
only because of their personal belief.
SWOT conclusion
GOG.com is a digital distribution platform offering a wide range of computer games, especially old
titles. A SWOT analysis helps to look at the companys internal strengths and weaknesses, and
also to identify external opportunities and threats. One of its strengths is an international cooperation
with publishers and developers from all around the world, which supports product diversification.
The GOGs weakness is the fact that the platform is focusing on the sales of old titles, whose
distribution isnt as profitable as distribution of the newest releases, especially triple-A video
games. Moreover, the fast-growing digital industry offers opportunities for effective development of
the business and acquirement of new competitive advantages. However, one of the threats is that
Steam will further strengthen its position in the market. Please refer to the Appendix 12 for the
SWOT analysis.
Share of Digital Distribution

Share of physical copies
Figure 14 Global Games Market 2012-2017
Investment summary
102,9
70,4
12,7
2012
2013
26,3
21,8
17,6
95,2
88,4
81,4
75,5
2014
2015
Sustainable improvement of financial position
30,7
2016
35,4
2017
Total Games Revenues (in bn)
Source: NewZoo.
Figure 15 CD Projekt S.A. stock price and WIG20 index
performance in the last 5 years
CD Projekt
So far, CD Projekt has not paid any dividends to its shareholders. It also do not use long-term loans.
The company benefits from such political conditions as e.g. the fact that Polish companies can
utilize European Funds as members of EU with developing economies.
Possible Investment Risk
Mobile Game Revenues
1600%
The CD Projekt financial situation in short-range forecasts is acceptable for current investors and
for those who would like to invest short-term basis, especially among Polish stock companies. CD
Projekt is approaching the release of its new valuable product, namely The Witcher 3: Wild Hunt,
which seems the most significant driver for the growth of the companys future value.
WIG20
1400%
Investors should be aware of two risks with the highest impact on the company and its profitability,
apart from high fluctuations of exchange rates. The company has to expand its activities, adapt to
rapidly changing trends in consumers needs and also keep on updating its strategic goals. One of
them is perception of developed game risk - if product does not meet gamers expectation, the final
sales results will be significantly lower than our estimates. Moreover, the huge impact on the
structure of CD Projekts revenues has seasonality of the game sales. The rest of investment risks
has been identified in Investment Risk section.
Hold the Witchers producer
1200%
Our recommendation for CD Projekt S.A. is to Hold stocks with a target price PLN 16.27, which is
very similar to its current price of 16.16 (estimated change over the next year is roughly 0.3%). The
analysis in terms of attractiveness of the whole industry and prepared valuations confirms strong
position of CD Projekt S.A. on the market. CD Projekt has a leading position within the Polish WIG
Informatics index and it is the leader on the domestic market as a video game developer and as a
provider of different types of entertainment.
1000%
800%
600%
400%
200%
Valuation Methods
0%
Source: The team estimate, Stooq.pl. Data as of January

29, 2015 (Base=100% for January 29, 2010).
Our target price was derived by using the Discounted Free Cash Flow method. The approach was
chosen because the companys sales have significant a seasonal factor. By 6 years period, we
captured 2 such periods which lasts 3 years each. Our terminal growth (3%) derives from the strong
fundamentals of the Polish economy. We assume that both video game development and digital
distribution will still grow but slower while the physical distribution in Poland business will be sold in
2016.
Industry overview and its prospects
Table 2 Total Sales until 2020 forecast for the Witcher 3
The company is operating in a steady growing entertainment industry. Consumers are spending
more
on
entertainment
and
media
YoY
6.4%
of
annual
increase.
The rapid development of new technologies and continuously rising consumer demand are the
reasons for which further growth directions have been appearing. Looking at global gaming market,
its revenues are expected to increase to over $102bn, with its fastest-growing market segments
being mobile phone and tablet games as well, with respectively CARG of 15.2% and 28.2%.
Doubtful long-term increase
Retail
Distribution
Digital
distribution
The US
1 493 100
614 900
2 108 000
Europe
and
the
rest
3 348 000
1 397 900
4 745 900
According to our calculations nearly 70% of the companys future assets of the company are going
to consist of cash. This fact may lead to a conclusion that the management should implement a
well-thought-out strategic plan to guarantee stable long-term prosperity of the company. As the
companys cash generation ability is relatively high, it should use its own funds to create and
implement a new investment project. Otherwise, the business is going to be unprofitable.
Sum
4 841 100
2 012 800
6 853 900
Valuation
Sum

Table 3 Total Sales until 2020 forecast for Cyber Punk
2077
Retail
Distribution
Digital
distribution
The US
1 255 000
598 000
1 853 000
Europe
and
the
rest
2 936 000
1 425 000
4 361 000
Sum
4 191 000
2 023 000
6 214 000
In order to valuate CD Projekt S.A., we used 2 methods DCF model and ratios model, with weights
of 100% and 0%, respectively. The first method consists of the estimated cash flows in the following
5 years (2015-2020, and partially 2014), with taking into account different scenarios. The ratio
analysis has a zero weight because we assume this business too cyclical. Several ratios, such as
P/E may be not too accurate because Price discounts expectations of future earnings while
Earnings (Net Profit) are strictly accounting-driven measure.
Sum
DCF Model
Sales

We have estimated Sales according to other AAA games (Table 2, more in Appendix 19). The most
convenient video game which is comparable in both production cost and genre is Destiny
(Appendix 17). We consider it also as a game heavily based on preorder sales. Additionally, it was
released in the middle of 2014. Also counted how does the game sales outside the EU and US
(Appendix 26)
The next step were estimations of the console base. It is important to notice that The Witcher 2 was
released when there had already been dozens of millions of PS3. To estimate how much the fact
Figure 16 Estimation of Sales as a percentage of Total

Sales of The Witcher 3 and Cyber Punk 2077 in the
following years after a game release
60.4%
Median
Mean
19.2%
5.3%
2.8%
6.6%
3.4%
Our assumption is that a fraction of gamers who will buy the CDPs product is going to be the same
as in the case of Dragon Age 3: Inquisition. We consider the mentioned game as a good indicator
as it is also from RPG genre and had a similar budget.
To estimate the sales pattern of both The Witcher 3 and CyberPunk 2077, we used the median
value of sales for 7 AAA video games (Call of Duty, God of War, Tomb Rider, and others), which
was released in the 1st or 2nd quarter of the year. We have omitted the releases during Christmas
time (Appendix 24-25).
46.5%
14.9%
of a lower number of consoles affects sales of The Witcher 3, we have used historical data of the
new generation consoles in the last months.
By calculating the whole pattern of triple-A video games sales, we have assumed that in the first
year, The Witcher 3s sales will equal to over 60% of its lifetime sales (Figure 16). Among other
things, in conjunction with very high hardware requirements we decided, however, to flattening of
sales to 50% in the first year (Appendix 14).
Five independent report results are that video games market is going to grow dynamically with the
medium value equals to 8.2% CAGR (Appendix 12). Moreover, Newzoo has published estimations
from which we can read that PC/MAC will be growing to 2017 by 3.3% (CAGR) while for TV consoles
this rise will equal to 0.8% (Appendix 10.4). Based on the Newzoo data, we calculated how it will
shape the relation of sales between consoles and PC and average growth (Appendix 18-19).
Source: The team estimate, VGChartz.com.
The CybePunk77 estimate is performed in the same way as in the case of the W3, however, we
believe the total sales will cover only 85% of total sales for the W3. It is due to the fact that The
Cyberpunk, as a brand, is relatively unknown outside the U.S (Table 3, more in Appendix 22).
Figure 17 GOG.com Sales

Sales
EBITDA
CAGR
350%
70%
300%
60%
250%
50%
200%
40%
150%
30%
100%
20%
50%
89%
38%
39%
38%
35%
33%
0%
10%
0%
2011
2012
2013
2014E 2015E 2016E
Physical distribution
GOG
Video game development
100 000
50 000
0
2014F 2015F 2016F 2017F 2018F 2019F

Table 4 Weighted Cost of Capital for CD Projekt S.A.
Poland 10Y Bond YIELD
(R F rate)
2.29%
Equity Risk Premium
5.07%
Risk for the Polish market SEM
4.92%
Risk for the US market SUS
3.72%
Country risk premium
1.63%
Beta monthly data
1.17
Adjusted monthly beta
1.11
WACC
Source: The team estimate, Stooq.pl.
After 5 years, we assume the stabilization of Sales (low price, much more consoles, more
customers in the emerging markets).
GOG
In the next years, Sales for GOG will increase, however, much slower than as of 2014. It is because
there is a limited number of old titles to acquire that can be sold on the GOG platform. We think that
the growth in Sales will be partially driven by entering new segments of the market, such as movies
and newer titles (from 2010s). Between 2014 and 2016 CAGR in Sales will converge to 6.4% and
this value has been a base for estimation for years 2016-2020.
Margins
Figure 18 Net profit breakdown
150 000
In our estimation, total units sold will be divided equally between the U.S. and Europe while the rest
of the world share will equal to 16.9%. We have assumed that a factor of growth in total revenues
lies in gamers from Asia, Africa, and Latin America. As previously mentioned, though video games
market will be growing, this tendency is going to shrink in the developed countries. The expected
growth for those 2 regions is weak and equals to nearly 0%-2%.
10.12%

We have assumed that margins will be lower in case of video games developing and GOG.com. In
the first case, it is due to the increasing cost of labour. We believe that salaries of high specified
knowledge workers will converge to the Western Europe and North America numbers. Thus,
EBITDA margin will decrease.
GOG
Our expectations are that margins for GOG will decrease. The strategy of acquiring old titles is
going to change because of capacity of the old video games market, as mentioned in the previous
section. CD Projekt will have to switch to acquisition of newer titles. As a unit cost of more recent
video games is higher, we believe it will surely affect margins in a negative way. At this point, GOG
is a niche entity and the leading one in its segment. Having a position of a monopsonist helps the
company to improve its additional markup. With newer titles, by which we mean video games from
2010s, the entity is going to position itself in a much broader and competitive market.Full graph of
EBITDA margin is in Appendix 18.
Retail distribution
In this segment, margins will remain constant as the company does not consider any changings in
the near future, except for eventual selling this part of the business.
WACC
In our estimation, calculated Weighted Cost of Capital equals to 10.12%. We have utilized CAPM
model by performing regression of CD Projekts stock monthly returns against monthly returns of
WIG20. Period used for calculations consisted of the last 5 years (period between December 31,
2009 and December 31, 2014). Obtained Beta coefficient equals to 1.17 and this value is justified
over the whole forecast period as we believe its core business, which is still game development and
digital distribution, will not change anytime soon. We think that diminishing share in revenues from
retail distribution will be offset by a greater share of GOG, which operational risk is the similar. The
company does not have any debts, as of 2014, and does not wish to have any in the future.
Therefore, WACC equals to Cost of Equity.
CAPEX
The core business of CD Projekt is not capital intensive. Most of its costs are incurred immediately,
e.g. for salaries for its employees. Therefore, we think CAPEX will equals to roughly 1.3mn a year
in the analyzed period.
Dividends
We assume that the company is going to continue no dividend policy. CD Projekt relies on 100%
self-financing, so we assume it wants to have some buffer in the future.
Tax
We have assumed that tax rate will remain constant over the period of our analysis.
Terminal Value
The terminal value was based on the average cash flow in years 2017-2019. This assumption
captures the whole cycle for the company from a year before a game release, through a game
release year, to a year after a game release. Additionally, we assumed terminal growth to be 3%
as we believe it is the long-term GDP growth in Poland.
Table 5 Cash Flow and Terminal Value Forecast
mn PLN
2014E
Net Sales
2015E
2016E
2017E
2018E
2019E
159 882
499 659
250 223
251 052
567 195
228 405
EBIT
5 056
146 548
55 235
64 125
150 473
49 968
NOPLAT
5 902
172 633
90 262
77 593
187 383
61 352
676
694
720
749
779
812
6 578
173 326
90 982
78 341
188 162
62 164
+ Depreciation
= Net Operating Cash Flow
CAPEX
3 848
-1 177
-1 239
-1 305
-1 376
-1 452
Change in NWC
-18 461
63 597
-72 697
242
92 138
-98 738
=Free Cash Flow
28 888
108 553
162 441
76 795
94 648
159 451
=Discounted Cash Flows
28 888
98 581
133 967
57 516
64 376
98 489
PV of Cash Flows
481 816
Discounted Terminal Value
1 063 389
WACC
10.1%
Equity Value
1 545 205
Number of shares (in mln)
94.95
Share price
16.27
Sensitivity Analysis
In this section, we have performed the sensitivity analysis with WACC and Terminal growth as
variables. Default values, based on DCF model, were 10.12% and 3%. In the following matrix of
results, we have shown the dependence of price on WACC and Terminal growth. The values differ
significantly and this is determined by the fact that we have estimated only 31% of value by
Discounted Cash Flows in years 2014-2019. The most of variation comes from Terminal growth
factor. Due to the fact that we have estimated Terminal Value with Gordon Model, the results are
especially sensitive when Terminal growth converges to WACC.
Table 6 Sensitivity matrix for CD Projekt stock price
WACC
Terminal growth
7%
8%
9%
10%
11%
12%
13%
0%
17.95
15.84
14.19
12.86
11.77
10.86
10.08
1%
20.17
17.46
15.41
13.81
12.52
11.47
10.58
2%
23.29
19.61
16.98
15.00
13.45
12.20
11.18
3%
27.96
22.64
19.08
16.52
14.60
13.10
11.89
4%
35.74
27.17
22.01
18.56
16.08
14.22
12.76
5%
51.30
34.72
26.41
21.41
18.06
15.66
13.85
6%
97.99
49.83
33.74
25.68
20.83
17.58
15.26
Comparable Valuation
We think that comparable valuation approach is not suitable for CD Projekt. First of all,
CD Projekt releases one game for every few years. Profits from developing games are the most
important drivers of earrings but are very violate due to the fact that roughly 60% of them is
generated in the first year. International peers release games every year, their profit are more stable.
Secondly, in last quarters ,due to lack of release of new games, 47% of CDP gross profit was
derived from sales of games via GOG.com platform. The digital distribution segment is not such an
important driver of profit for peers companies. Steam, the major international competitor in digital
distribution, is not a public-listed company and its financial data are not distributed into public and
hence could not be used for valuation.
We have performed peer group multiples analysis. The group consists of the major international
competitors such as Activision Blizzard, Electronics Arts, Ubisoft Entertainment, and other game
developers and distributors. Finally, we have excluded Ubisoft Entertainment from comparable
valuation because its impact on mean has been too huge due to extremely high P/E in comparison
to others.
Financial Analysis
We have used financial ratio analysis to research the ways in which CD Projekt is currently
performing and compare these results with the past performance and financial situation of the
company.
Self-financing and cash generation abilities

The company mainly uses internally-generated funds to finance and expand its activities. In
addition, CD Projekt has effectively utilised grants received from the EU to realise its projects. In
our opinion, cash generation ability of the companys core activities, especially future earnings from
sales of The Witcher 3: Wild Hunt and Cyberpunk 2077, and also revenues from distribution via
digital platform will be enough to cover expenses in a long-term perspective.
The liquidity ratios have confirmed CD Projekts ability to meet its obligations without any
difficulties (Current Ratio 2012: 2.48 2013: 2.72). We predict such a trend will increase in the
estimated period. The amount of the most liquid possessed assets will be 3 times greater than shortterm debts in 2017 (Cash Ratio 2017E: 3.2). For more key financial ratios please see Appendix 4.
In previous years, it took the company only 66 days on average to collect account receivables.
Payments are being carried out so quickly in view of the most commonly used method made by
credit cards. Thats why, in our opinion, this trend will continue in the projected period. The average
inventory days ratio was 97 days during the period between 2011 and 2013, however, the ratio
for 2013 amounted to more than 133 days due to ongoing preparation for the huge release. We
expect that the ratio will increase to an average of 132 days in the period of forecast due to the work
of games development in progress and the physical delivery of future titles.
Profitability Ratios
Gross Profit Margin decreased over the years 2011-2013, but it is still over 40%. The changes of
margins may depend on the product lifetime. Developing of the main product video game, which
generates the majority of changes in revenues and costs of sales, is a long-term process. After the
releases of The Witcher 3: Wild Hunt and Cyberpunk 2077 (2015E 2018E), Gross Profit Margin
is expected to remain above 50%. Other businesses (GOG.com, cdp.pl) are generating a rather
sustainable profit YoY. Costs are balanced by revenues. Maintaining constant correlations, the
Gross Profit from sales increases while the costs are lower or while the scale of sales expands.
In the researched period 2010-2013, the company was still building up their core business
developing of video games. The quality of their products improves so that total costs were constantly
growing. We assume that usually the release of a new video game is a reason, which has the main
impact on gross profit from sales. The changes are cyclical, but the Gross Profit Margin of CD
Projekt Capital Group is rather stable thanks to profits from other businesses.
Operating Margin as well as Gross Profit Margin could be analysed in the context of product
lifetime and thus Operating Margins is expected to reach the highest rates in years 2015E: 29.3%
and 2018E: 26.5%, while the companys main products will be released. To confirm, it is worth
noting that the highest ratio in 2011-2013 was recorded while The Witcher 2: Assassins of Kings
was released (2011: 20.3%).
Calculation of a Net Profit Margin shows us that every PLN of sales allowed to the company earn:
17.6% in 2011, 17.1% in 2012 and 10.5% in 2013. According to our calculation, during the
forecasted period, the CD Projekt will be able to cover its operating costs including indirect costs.
Return on Assets displays that CD Projekt is able to turn its assets into profit. Even comparing CD
Projekt ROA in 2013 (6.8% - the lowest one in 2011-2013) to its global competitors like Ubisoft
(5.5% - the highest one in years 2011-2013) or Take-Two Interactive Software Inc (4.8% - the
highest one in years 2011-2013) the situation of a Polish company seems to be favourable. CD
Projekt has found the way to operate more efficiently against its competitors. We expect future level
of return on assets ratios to be an average of 8% in mid-term. However, ROA is estimated to amount
only 1% in 2014E due to delays in the process of game development.
Figure 19 Matrix risk for the CD Projekt
Return on Equity forms as follows: 19.4% in 2011, 18.6% in 2012, 8.9% in 2013. In comparison
with CD Projekt ROEs, Polish Treasury 10-Y Bonds return was about 6.07%, 5.91%, 3.73% and
4.35% YoY in the analysed period. Our analysis shows that levels of ROE in 2015E-2019E will be
attractive for investors, however it should be taken into consideration that a potential for further and
stronger growth is highly limited. There is a strong correlation between results of ROE and games
releases. The company's profits depend on the quality of developed and sold products and therefore
the purchasers satisfaction.
Investment Risks
Concentration of Revenue Among Top Titles
Hit titles earn a significant portion of total revenue in each segment. According to The NPD Group,
in 2013 the Top 10 bestselling titles accounted for 38% of the sales in the industry in the USA in
comparison to 30% in 2012. Market participants expect that trend will be continued in the industry.
The CDP needs to deliver the best games in each segment. otherwise revenue could significantly
drop. (Activision Blizzard Inc. Annual Report 2013, Electronic Arts Annual Report and Proxy
Statement 2014). Please be informed that detailed analysis of Investment Risks is presented in
Appendix 34, 35 and 36.
10
Console and Equipment

Figure 20 Estimated sales vs Metacritic rating
Introduction of new console system produces additional cost of switching. During transitory period
game developer release titles on both console, what is costly. Constant improvement in game
quality is the effect of increasing computing power of hardware. The CDP success will depend on
ability to develop the best game on upcoming platforms.
Piracy Risk
Entertainment software industry is highly affected by data piracy laws and consumer attitude to
piracy. Intellectual protection on the internet is the key issue for the whole entertainment industry.
Percentages of illegal software used by consumer differ significantly across countries. According to
Business Software Alliance Survey, the global rate at which PC software was installed without
proper licensing was 43% in 2013 in comparison to 42% in 2011.
Perception Of Game
Source: Ars Technica.
Green dots represent the median sales performer at
every individual Metacritic score.
Figure 21 Monthly salaries across industries in Poland
and USA
USA
Poland
18
16
14
12
10
8
6
4
2
0
Perception of Game is the key point to success in the game industry. As a result of one game under
consumers expectation, perception of a whole franchise may be harmed. The CDP could incur
substantial costs and also lose both customers and revenues.
Channel Partners Risk

Video games are sold to customers through channel partners as Sony, Microsoft. They have a
freedom to set rates that the CDP must pay to provide games via online channels. Channel partners
could change fee structures for online channels. It could adversely impact costs, which led to a loss
in profitability and margins. In comparison to PC producer, Sony and Microsoft need to accept a
game before release. According to PWC Global entertainment & media outlook 2014-2018 Hong
Kong total game consumer spending on PC games will decrease 13% from 2013 to 2018 but
spending on console game grows 22% from 2013 to 2018. It is highly probable bargaining power of
console producers will increase.
Personnel Risk
In this industry, human resources are essential. Good reception of CD Projekt-produced games
opens their personnel opportunities to work for other companies. Salaries offered by top
entertainment software producer located in the USA are greater than these offered by the CDP.
Thus, this brain drainage is highly possible.
Risk of Change in Public Taste and Preferences
Source: Bankier.pl.
All values on vertical axis in PLN.
Figure 22 EURPLN and USDPLN exchange rates
Video games are a substitute for watching TV, going to the cinema and watching movies. According
to Entertainment Software association, about 45% gamers who play more video games than they
did three years ago are spending less time watching TV, going to the cinema and watching movies.
Change in public preferences connected with spending a leisure time could have a negative impact
on the industry.
European Union Funding

CD Project use conditional funds form European Union. The company need to fulfill all provisions
of agreement in other case will be obligated to return all money. The extension. The scope of EU
funding show Figure 5
Risk of Change in primary devices used to play video games

Constant and rapid development of personal devices like tablets and smartphone could change
public preferences. Improvement of hardware system could lead to switching game player from PC
and console to tablets and smartphone. According to Newzoo Global Games Market Report global
mobile games revenue is forecast to rise at CAGR of 19.1% in comparison to total game industry
growing at CAGR of 8.1%. Main drivers of growth will be rising smartphone ownership which will
lead to increasing access to mobile phone games.
Risk of Seasonality
Video Games business is seasonal with the highest quantity of sales in the 4th quarter due to
Christmas time. All delays in production could adversely impact revenue if a game would be not
finished on time.
Currency Risk
The CDP operates in Poland but most revenue, approximately 80%, earns in foreign currencies
(U.S. dollar and Euro). Hedging position is possible only in short-time and generates costs. Change
in exchange rates could adversely impact company profitability and margins. As it is shown on
Figure 7, the market volatility for those quotations were especially high during the crisis. If it occurs
the next time, CD Projekt will suffer from it with a high probability.
Source: The team estimate, stooq.pl.

Left axis contains values for exchange rates, right axis
contains 60 days standard deviations of log returns for
quotations.
11
APPENDIX
Appendix 1 Comprehensive balance sheet in years 2011-2019
ASSETS
2018E
2019E
94 964
108 690
122 588
194 413
442 647
479 997
557 208
810 400
799 950
9 819
26 866
39 684
68 572
177 124
339 565
416 360
511 008
670 459
Receivables
32 757
35 882
20 920
29 759
84 078
42 105
42 245
95 442
38 434
Inventories
31 112
33 367
51 966
85 626
166 498
83 380
83 657
189 003
76 110
Other current assets
21 276
12 575
10 018
10 456
14 947
14 947
14 947
14 947
14 947
Fixed assets
90 762
94 202
95 047
94 206
96 644
100 339
104 305
108 564
113 136
Current assets
Cash and cash equivalents
PPE
Intangible assets
2011
2012
2013
2014E
2015E
2016E
2017E
9 924
10 755
11 187
6 663
7 146
7 665
8 221
8 817
9 457
77 923
34 801
36 403
40 122
43 080
46 257
49 668
53 330
57 262
2 002
46 417
46 417
46 417
46 417
46 417
46 417
46 417
46 417
913
2 229
1 040
1 004
Long-term investments
Goodwill
Other non-current assets
Total assets
LIABILITIES
Current liabilities
185 726
2011
202 892
2012
217 635
2013
288 619
2014E
539 291
2015E
580 336
2016E
661 513
2017E
130 255
918 964
913 085
2018E
2019E
196 661
125 498
54 327
43 758
44 991
106 390
182 475
130 081
Payables
28 869
104 954
52 559
52 734
119 140
47 977
9 583
Other current liabilities
25 458
61 196
7 568
53 657
63 335
82 104
120 672
196 661
125 498
Long-term liabilities
7 590
7 604
5 276
6 651
6 651
6 651
6 651
6 651
6 651
Short-term borrowing
Long-term liabilities
Other non-current liabilities
Equity
Retain earnings
7 590
7 604
5 276
6 651
6 651
6 651
6 651
6 651
6 651
123 809
151 530
167 368
175 578
350 165
443 604
524 607
715 652
780 937
201 655
200 150
208 256
220 834
220 834
220 834
220 834
220 834
220 834
101 530
76 459
55 987
54 133
51 182
62 340
111 530
161 748
274 274
278
286
199
5 926
Other equity components

Net income
Total liabilities and equity
23 962
28 125
14 900
2 951
113 522
49 190
50 218
112 526
40 420
185 726
202 892
217 635
288 619
539 291
580 336
661 513
918 964
913 085
Source: The team estimate, CD Projekt data.

Appendix 2 Profit and loss statement in years 2011-2019
P&L STATEMENT
2018E
2019E
136 210
164 040
142 172
159 882
499 659
250 223
251 052
567 195
228 405
COGS
54 504
89 618
83 186
114 214
215 619
112 426
117 567
239 636
118 207
Gross profit (loss) from

sales
81 706
74 422
58 986
45 668
284 040
137 797
133 485
327 559
110 198
SG&A
49 567
38 306
40 874
41 344
138 044
85 139
70 075
180 679
60 871
4 517
7 749
3 238
732
552
2 577
716
3 593
641
27 622
28 367
14 874
5 056
146 548
55 235
64 125
150 473
49 968
Sales revenues
Other net expenses

EBIT
Net Financial Revenues
2011
2012
2013
2014E
2015E
2016E
2017E
393
80
2 316
4 958
2 803
6 842
2 429
10 204
2 092
EBT
28 015
28 447
12 558
10 014
149 351
62 077
66 554
160 677
52 060
Tax Expense
Profit from continued
operations
Profit from discontinued
operations
3 267
162
2 339
5 487
23 282
9 058
11 038
26 706
9 292
24 748
28 285
10 219
4 527
172 633
71 135
77 593
187 383
61 352
Net Profit
24 748
28 285
10 219
4 527
172 633
77 593
187 383
61 352
19 127
90 262
12
Appendix 3 Cash flow statement in years 2011-2019

CASH FLOW STATEMENT
Net Profit
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
2019E
27 229
28 125
14 851
4 527
172 633
90 262
77 593
187 383
1 536
1 978
2 617
676
694
720
749
779
812
Change in NWC
14 427
5 920
4 506
18 461
63 597
72 697
242
92 138
98 738
Change in long-term liabilities
10 517
2 436
4 990
Change in other equities
14 595
1 711
6 231
Total Operating Cash Flow
10 774
23 458
24 183
23 665
109 730
163 679
78 099
96 024
160 902
CAPEX
2 634
3 939
4 108
3 848
1 177
1 239
1 305
1 376
1 452
Change in Financial Asset
3 865
3 512
143
1 177
1 239
1 305
1 376
1 452
Depreciation
Investment Activities
Total cash from investing
Cash flow from financing
61 352
260
302
162
6 239
125
4 127
3 848
263
9 523
5 109
1 375
263
(9 523)
(5 109)
1 375
5 791
17 047
12 818
28 888
108 553
162 441
76 795
94 648
159 451
15 610
9 819
26 866
39 684
68 572
177 124
339 565
416 360
511 008
9 819
26 866
39 684
68 572
177 124
339 565
416 360
511 008
670 459
Dividend paid
Total cash flow financing
Net change in cash
Beginning cash
Ending cash

Appendix 4 Ratios in years 2011-2019E
RATIOS
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
2019E
Gross Profit Margin
60.0%
45.4%
41.5%
28.6%
56.8%
55.1%
53.2%
57.8%
48.2%
Operating Margin
20.3%
17.3%
10.5%
3.2%
29.3%
22.1%
25.5%
26.5%
21.9%
Net Profit Margin
17.6%
17.1%
10.5%
1.8%
22.7%
19.7%
20.0%
19.8%
17.7%
Return on Assets
12.9%
13.9%
6.8%
1.0%
21.1%
8.5%
7.6%
12.2%
4.4%
Return on Equity
19.4%
18.6%
8.9%
1.7%
40.1%
14.8%
13.1%
22.7%
7.5%
Current Ratio
1.75
2.48
2.72
1.80
2.43
3.69
4.28
4.12
6.37
Quick Ratio
1.18
1.72
1.57
1.00
1.51
3.05
3.64
3.16
5.77
Cash Ratio
0.18
0.61
0.88
0.64
0.97
2.61
3.20
2.60
5.34
66.6%
57.4%
66.9%
58.9%
19.3%
40.1%
41.5%
19.1%
49.5%
NWC Turnover
0.22
0.32
0.36
0.30
0.48
0.60
0.65
0.67
0.74
ACC Receivable Turnover
4.3
5.2
8.3
7.6
5.9
5.9
5.9
5.9
5.9
Days of Sales Outstanding
84.5
69.5
43.8
47.8
61.4
61.4
61.4
61.4
61.4
Inventory Turnover
4.38
4.92
2.74
1.87
3.00
3.00
3.00
3.00
3.00
Days of Inventory on Hand
83.4
74.2
133.4
195.5
121.6
121.6
121.6
121.6
121.6
Payables Turnover
2.51
3.75
3.16
1.50
2.74
1.92
1.93
2.88
1.82
Number of days of payables
145.6
97.4
115.5
242.9
133.3
189.7
189.4
126.6
200.6
Cash Conversion Cycle
22.3
46.4
61.7
0.4
49.7
-6.7
-6.3
56.5
-17.5
Long-Term Debt to Assets
0.04
0.04
0.02
0.02
0.01
0.01
0.01
0.01
0.01
Debt Ratio
0.33
0.25
0.23
0.40
0.35
0.24
0.21
0.22
0.14
Financial Leverage
1.50
1.34
1.30
1.65
1.90
1.75
1.73
1.86
1.71
0.25
0.30
0.16
0.03
1.20
0.52
0.53
1.19
0.43
Profitability Ratios
Liquidity Ratios
Efficiency Ratios
Fixed Asset Turnover
Solvency Ratios
Shareholder Ratios
Earnings Per Share
13
Appendix 5 Average margins and physical and digital share in distribution for The Witcher 3 and Cybyrpunk 2077 in years 2014-2019
Timeline
Average margin
2014
43.4%
43.4%
43.3%
43.5%
44.4%
44.7%
2015
2016
2017
2018
2019
Distribution
2014E
2015E
2016E
2017E
2018E
2019E
Physical
74.00%
72.57%
71.06%
69.47%
67.79%
66.02%
Digital
26.00%
27.43%
28.94%
30.53%
32.21%
33.98%
CAGR
5.50%

Appendix 6 CD Projekt and its competition financials
Company
PL
JPY
JPY
JPY
JPY
JPY
JPY
Stock
Exchange
WSE
NIKKEI 225
NIKKEI 225
NIKKEI 225
NIKKEI 225
NIKKEI 225
NIKKEI 225
USD
USD
USD
USD
USD
NASDAQ
NASDAQ
NASDAQ
NASDAQ
NASDAQ
KARW
EURO
GBP
KRX
EPA
LON
Market Cap
in B
1.56
126.36
159.49
460.08
315.35
524.58
310.07
EV/EBITDA
ROA
ROE
719.1
74.4
18.0
7.4
31.1
19.4
59.9
35.0
24.0
49.0
14.2
N/A
10.4
24.4
20.2
241.8
17.8
45
445.2
1%
3%
7%
72%
3%
6%
1%
16%
7%
0%
24%
-2%
7%
7%
11%
-5%
53%
13%
1%
5%
8%
120%
5%
10%
2%
25%
11%
0%
46%
-2%
10%
13%
15%
-8%
68%
21%
All Peers Mean (excluded

Ubisoft)
29
CDP Projekt premium versu

video games peers (exclude
Ubisoft)
25
78
0.66PLN
0.29PLN
CD Projekt
Capcom
Tecmo Koei Holdings
GungHo Online Entertainment
Square Enix Holdings
Namco Bandai Holdings
Konami
NIKKEI Peers Average
Activision Blizzard
Electronic Arts
Take-Two Interactive Software
Zynga
Perfect World
NASDAQ Peers Average
NCSoft
UBISOFT Entertainment
PlayTech
All Peers Mean
Currency
CD project value based on the

comparables
14.80
15.17
2.48
2.39
0.95
4.77
1.81
2.01
P/E
13.8
20.2
4.0
20.0
5.7
4.7
10.4
5.3
6
Operating
Margin
1%
5%
18%
56%
5%
8%
4%
16%
30%
1%
17%
-8%
11%
10%
25%
-10%
34%
14%
Data on
2014
2014
2014
2013
2014
2014
2014
2013
2014
2014
2013
2013
2013
2014
2013
Source: The team estimate, Yahoo! Finance.
14
Appendix 7 Game consoles sold worldwide (in millions of units)
Please be informed that the following data show the quantitative trends in cumulated and annual sales of video game consoles. These information
help to indentify users and to estimate future directions in development of selected game platforms worldwide.
The 20 best-selling game platforms
No.
Platform
North America
Europe
Japan
Rest of the World
Global
1
2
3
4
5
6
7
8
PlayStation 2
Nintendo DS
Game Boy
PlayStation
Wii
PlayStation 3
Xbox 360
Game Boy Advance
53.65
57.37
43.18
38.94
45.37
29.00
48.26
40.39
55.28
52.07
40.05
36.91
33.75
33.45
25.57
21.31
23.18
33.01
32.47
19.36
12.77
10.21
1.66
16.96
25.57
12.43
2.99
9.04
9.28
12.07
8.99
2.85
157.68
154.88
118.69
104.25
101.17
84.73
84.48
81.51
9
10
11
12
PlayStation Portable
Nintendo ES
Nintendo 3DS
Super Nintendo ES
21.41
24.14
8.30
13.37
8.15
20.01
19.35
18.12
17.17
15.26
0.77
3.10
0.90
80.82
61.91
50.45
49.10
13
14
15
16
17
18
19
Nintendo 64
Sega Genesis
Atari 2600
Xbox
Game Cube
PlayStation 4
Xbox One
20.11
16.98
23.54
15.77
12.55
7.51
6.87
6.35
8.39
3.35
7.17
4.44
7.39
2.91
5.54
3.58
0.53
4.04
1.01
0.05
0.93
0.59
0.75
1.18
0.71
2.69
1.27
32.93
29.54
27.64
24.65
21.74
18.60
11.10
20
Game Gear
5.40
3.23
1.78
0.21
10.62
33.49
15.86
22.88
Source: VGChartz.
Appendix 8 Global unit sales of current generation video game consoles from 2008 to 2012 (in million units)
Unit sales of current generation video game consoles

Video game console
2008
2009
2010
2011
2012
2013
Sony Playstation 3
10.2
13
14.18
15.09
12.98
8.94
Sony PSP
14.05
9.86
9.61
7.71
4.5
3.08
3.77
3.12
Sony Playstation Vita

Xbox 360
10.91
10.16
13.53
14.07
11.33
6.11
Nintetndo Wii
24.19
21.3
17.68
11.83
5.36
2.06
2.37
3.09
8.86
3.05
0.82
13.72
14.91
14.74
Nintetndo Wii U
Nintendo DS
Nintendo 3DS
29.66
27.57
20.97
Source: Statista
15
Appendix 9 Global trends: Expenditures on media and entertainment

1.
Total spending by region from 2013 to 2018

Total spending on entertainment and media by region (in mn USD)
Region
2013
2014
2015
2016
2017
2018
2013-2018
CAGR
North America
448 930
476 142
497 816
527 166
552 123
584 809
5.4%
Western Europe
396 362
406 626
419 349
434 316
450 186
467 433
3.4%
Central and Eastern Europe
56 715
61 425
66 936
72 735
78 935
85 462
8.5%
Middle East-Africa
35 012
39 871
44 727
50 977
57 722
65 203
13.2%
EMEA total
488 089
507 922
531 012
558 028
586 843
618 098
4.8%
Asia-Pacific
506 855
547 672
591 305
637 993
685 338
734 395
7.7%
Latin-America
Total
111 477
125 360
137 802
154 536
169 760
187 153
10.9%
1 555 351
1 657 096
1 757 935
1 877 723
1 994 064
2 124 455
6.4%
Source: Global Media Report 2014, McKinsey&Company

2.
Spending by digital and non-digital status worldwide from 2013 to 2018

Global spending by digital/non-digital status (in mn USD)
Status
Digital*
Non-digital
Total
2013
2014
2015
2016
2017
2018
624 058
931 293
1 555 351
704 940
952 156
1 657 096
787 642
970 293
1 757 935
877 022
1 000 701
1 877 723
971 163
1 022 901
1 994 064
1 069 251
1 055 204
2 124 455
2013-2018
CAGR
11.4%
2.5%
6.4%

* Digital consists of spending on broadband, transactional video-on-demand through TV subscription providers, OTT transactional digital video, OTT subscription digital
video, digital recorded music downloads, digital recorded music-streaming subscriptions, consumer magazine digital circulation, daily newspaper digital circulation,
electronic consumer books, digital learning materials, online video games, and mobile video games
3.
Total global spending on entertainment by category

Total global spending on entertainment by category (in mn USD)
Category
2012
2013
2014
2015
2016
2017
2018
In-Home Video Entertainment
270.59
283.084
296.49
311.168
325.943
340.694
355.112
Audio Entertainment
93.567
96.544
96.376
98.009
100.337
102.965
106.049
Cinema
35.914
37.223
39.184
41.226
43.383
45.629
47.901
Out-of-Home
30.27
31.822
33.604
35.496
37.713
39.997
42.388
Consumer Books
70.574
71.454
71.958
72.532
73.13
73.635
74.084
Video Games
63.698
70.028
77.455
85.284
93.285
101.308
109.31
16
Appendix 10 Global Trends of Game Market
1.
Gamers and revenue in 2014E
2.
2013-2017 Global Games Market
Global Game Market 2013-2017, in %
Global Game Market in 2014E by gamers and revenue

Region
Gamers
Revenue (in bn)
Market Segment
Total
1 775 489 000
81.4
TV Console Games
LATAM
185 180 000
3.3
NAM
195 016 000
22.2
APAC
826 544 000
36.8
MEA
230 435 000
1.4
EU
338 314 000
17.7
2013 2014 2015 2016 2017

31
6
6
17
10
20
10
29
4
8
19
9
22
9
27
3
10
20
9
22
9
25
3
11
21
8
23
9
24
2
12
22
8
23
9
0.8
-14.7
28.2
15.2
3.3
11.2
5.8
75.6
81.5
88
95.2
102
8.1
Handheld Games
Tablet Games
Mobil Phone Games
(Mid)-Core PC/Mac Games
MMO Games
Casual Webgames
Total Revenue in bn USD
CAGR
in %
Source: NewZoo
Source: NewZoo
3.
Global video game markets, segmented by forecast rate of growth and scale, 2013-2018
Lower-growth, larger-scale
Markets worth more than 750mn USD in
2018 but less than 7% CAGR to 2018
Higher-growth, larger-scale
Markets worth more than US 750mn USD in
2018 and 7% or more CAGR to 2018
North America: Canada, US

APAC: Australia, China, Japan, South Korea
EMEA: France, Germany, Italy, Netherlands,
Spain, UK
APAC: India
EMEA: Russia
Latin America: Brazil, Mexico
Lower-growth, smaller-scale
Markets worth less than 750mn USD in 2018
and less than 7% CAGR to 2018
APAC: Hong Kong, Malaysia, New Zealand,
Pakistan, Taiwan
EMEA: Austria, Belgium, Denmark, Finland,
Greece, Ireland, Norway, Portugal, Sweden,
Switzerland, Israel, Romania, Rest of MEN
Higher-growth, smaller-scale
Markets worth less than 750mn USD in 2018
and 7% or more CAGR to 2018
APAC: Indonesia, Philippines, Singapore,
Thailand, Vietnam
EMEA: Czech Republic, Hungary, Poland,
Turkey, Egypt, Saudi Arabia, UAE, Kenya,
Nigeria, South Africa
Latin America: Argentina, Chile, Colombia,
Peru, Venezuela
Source: Global entertainment and media outlook 20142018, PwC.

4.
Estimated CAGR of global game market segment
CAGR in 2013-2018 of game market segments

Casual Webgames
5.8%
MMO Games
11.2%
(MID) - Core Games
3.3%
Mobile Phone Games
15.2%
Tablet Games
28.2%
Handheld Games
-14.7%
TV/Console Games
0.8%
Source: Newzoo
17
Appendix 11 Porters five forces analysis for CD Projekt RED Studio

Threats of New Entrants
5
4
3
Bargaining Power of
Suppliers
2
1
Bargaining Power of
Buyers
Threat of Substitute
Products
Competition in the Industry
Final rating: 3.8

1.
Threat of New Entrants

a. low legal barriers to do business
b. high operating expenditures are needed, although low registered capital is necessary
c. fast-growing video game market
d. difficulties with gaining publishers and distributors trust
e. growing digital market attractiveness for new independent developers
2.
Bargaining Power of Buyers

a. great number of potential buyers worldwide
b. huge product differentiation
c. aware and mature gamers with defined expectations
d. high diversification of video game buyers
e. unlimited availability of substitutes
3.
Threat of Substitute Products

a. easier, wider and cheaper access to traditional entertainment like movies, books, audiobooks, board games
b. fast-growing digital entertainment market, especially apps and games for portable devices
c. growing use of tablets and smartphones due to social changes and necessity to commute
d. spending leisure time in an active way as a result of healthy lifestyle trends
4.
Competition in the Industry

a. a few leading developers heavily competing on a global market
b. high growth rate of game industry
c. huge involvement of fixed costs in game development
d. high level of product differentiation because of original character of each product
5.
Bargaining Power of Suppliers

a. lack or marginal role of external suppliers cooperating in a process of developing a game
b. necessity of hiring highly qualified professionals - suppliers of know-how
c. medium-concentrated market of publishers
d. advantage with forward integration publishers becoming competitors for developers
18
Appendix 12 SWOT Analysis for GOG.com
international cooperation with publishers and developers (more than 200 partners
worldwide),
synergy effect of capital group - support by distribution of games developed by CD
Projekt RED Studio and loaning money within the group,
high quality of customer service: consumer loyalty programs, in-home supportive
service, bonuses and other conveniences such as 30 days Money Back Guarantee
acceptance of payment in different currencies (USD, EUR, GBP, AUD and Rubles),
auto-updating platform GOG Galaxy, which could enhance usage of GOG.com as a link
between gamers from GOG.com and STEAM;
lack of DRM system - no protection against unauthorized users and illegal copying,
focus on sales of old titles - smaller scale of operation and thereby lower revenues,
lack of A-triple video games in sales offer (apart from The Witcher 3: Wild Hunt),
limited range of marketing activities,
offer addressed to PC owners, who enjoy doing online shopping, not meeting the
needs of gamers who prefer to have a traditional box-edition;
changes of customers habits - traditional methods of distribution replaced by digital

methods
suceeding proccess of game development by partners,
further development of new technologies,
wider access to the Internet,
decreasing viability of physical distribution of classical games (costs of transport,
packaging);
high concentration in the digital distribution market,

deepening problem of illegal online activities,
further development of the market leader (Steam) at the expense of smaller,
independent distributors,
changes in customers attitude towards a digital sales channel,
risk that offered games may not meet customers expectations;
Source: The teams estimation.
19
Appendix 13 The profile of a gamer, based on The 2014 Essential Facts About the Computer and Video Game Industry, ESA
The following data show characteristics such as age, gender, types of game spending and needs of world game-population. Selected facts inform
about interesting trends in the game industry. Its worth mentioning that that the group representing the majority of players is potential purchasers of
game developed by CD Projekt Red Studio. The companys products are targeted to mature and aware gamers appreciating high quality.
1.
Age of game players
2.
Gender of game players
29%
39%
48%
52%
32%
under 18 years
3.
18-35 years
36+ years
male
female
Total Consumer Spend on Games Industry 2013

18
16
14
12
10
8
6
4
2
0
Content
4.
Hardware
Accessories
Best-Selling Computer Games by Units Sold in 2013

Strategy
Other
Games/Complications
Action
Adventure
Arcade
Casual
Children's Entertainment
Family Entertainment
Flight
Racing
Role-Playing
Shooter
Facts:
Adult gamers have been playing for an average of 16 years, with adult men averaging 18 years and adult women averaging 13 years.
The number of female gamers age 50 and older increased by 32% from 2012 to 2013.
" Smartphone and wireless device use increased by 22% and 37%, respectively, over 2012.
20
Appendix 14 The profile of an average Polish gamer

1.
Frequency of playing games*

3%
2.
Time spent playing games* (a week)
1%
to 10 hours
Everyday
18%
8%
25 hours and
more
11%
2-3 times a
week
once a week
36%
20-24 hours
15%
15-19 hours
occasionally
78%
10-14 hours
30%
3.
Devices used to play games*
Net salary working gamers (in PLN)
92%
lack of information
more than 3200
50%
2401-3200
36%
1601-2400
12%
801-1600
to 800
Computer
Mobile
Phone or
Tablet
Console
Handheld
console
0%
10%
20%
30%
40%
Source: Jestem graczem, Ipsos 2014

Appendix 15 Expectation of CAGR for global games markets
PwC
IDC
Gartner
DFC
Newzoo
Average
7.2%
9.3%
10.5%
6.0%
8.1%
8.2%
Source: Global Games Market Newzoo

Note: Compound annual growth rates cover different periods: PwC (2012-16), IDC (2011-16), Gartner (2011-2015), DFC(2012-17), Newzoo (2012-2016).
Appendix 16 The Witcher 3: Wild Hunt PC system requirements
Minimum System Requirements

Intel CPU Core i5-2500K 3.3GHz
AMD CPU Phenom II X4 940
Nvidia GPU GeForce GTX 660
AMD GPU Radeon HD 7870
RAM 6GB
OS 64-bit Windows 7 or 64-bit Windows 8 (8.1)
DirectX 11
HDD Space 40 GB
Recommended System Requirements

Intel CPU Core i7 3770 3.4 GHz
AMD CPU AMD FX-8350 4 GHz
Nvidia GPU GeForce GTX 770
AMD GPU Radeon R9 290
RAM 8GB
OS 64-bit Windows 7 or 64-bit Windows 8 (8.1)
DirectX 11
HDD Space 40 GB
Source: The company data
21
Appendix 17 Cumulated preorders upon the Destiny release.

Weeks to the game
release
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
2
1
PS4
Xbox One
PS3
Xbox 360
326 576
331 252
338 146
344 189
349 799
353 898
363 493
376 158
387 325
395 248
402 202
410 132
417 058
446 458
502 794
542 618
586 279
644 139
700 200
754 233
782 701
820 567
852 977
874 856
902 879
935 999
902 879
935 999
284 131
288 004
293 022
298 295
302 951
306 902
321 254
330 548
337 242
344 278
350 016
356 998
364 454
374 829
397 012
419 299
443 884
495 289
536 169
592 676
642 101
673 053
695 467
710 041
726 522
750 052
726 522
750 052
60 792
61 497
62 407
63 988
64 920
65 963
68 484
70 772
72 740
74 059
76 039
78 093
79 987
81 476
83 967
85 766
88 463
96 301
106 341
121 089
130 404
133 984
137 067
137 867
140 436
144 854
140 436
144 854
132 823
134 009
135 622
137 642
139 374
141 285
145 272
148 727
152 308
155 137
157 406
159 610
162 610
165 537
169 644
173 886
178 958
196 857
213 905
245 025
266 834
282 905
289 117
293 753
303 575
326 573
303 575
326 573
Source: VGChartz.
Sales of the Destiny prior to the game release helped in estimating Sales for the W3.
Appendix 18 GOG Sales and EBITDA margin
Sales
EBITDA
CAGR
120 000
70%
100 000
60%
50%
80 000
40%
60 000
30%
40 000
20%
20 000
89%
39%
38%
38%
35%
33%
32%
32%
32%
32%
2014E
2015E
2016E
2017E
2018E
2019E
2020E
10%
0%
2011
2012
2013
Source: The team estimate, the CDP data.

Values for CAGR series are on the right axis. Values on the left axis are in th PLN.
22
Appendix 19 Sales forecast for The Witcher 3

PC
All values in USD
the
US
Timeline
Classical retail
distribution
Europe
and the
rest
2015 10w
2015 6m
59.99
49.99
67.79
56.49
2016
2017
2018
2019
42.49
29.99
24.99
19.99
48.01
33.89
28.24
22.59
232 005
65 497
37 158
25 605
2015 10w
2015 6m
2016
2017
59.99
49.99
42.49
29.99
67.79
56.49
45.19
33.89
2018
24.99
2019
19.99
Average price
Europe
and the
rest
the
US
Sales
Unit sales
Europe and
rest
Unit sales
in the US
Total
Revenues
Sales
17 319 853
1 791 667
59.99
49.99
79.09
67.79
1 210 940
148 119
523 569
66 912
42 802 056
4 508 627
60 121 909
6 300 294
105 749
29 851
16 953
11 768
7 177 951
1 430 210
676 369
373 768
42.49
29.99
24.99
19.99
59.31
45.19
28.24
22.59
725 015
196 490
108 778
73 143
330 465
89 553
49 629
33 616
19 193 752
3 875 934
1 467 799
791 492
26 371 703
5 306 144
2 144 168
1 165 260
813 285
164 379
20 106
94 480
28 784
361 148
71 072
9 083
43 065
13 119
28 769 818
9 224 621
953 881
3 671 761
821 662
59.99
49.99
42.49
29.99
79.09
67.79
56.49
45.19
2 462 485
493 137
60 319
295 251
86 353
1 093 745
213 215
27 249
134 577
39 357
72 639 660
30 794 434
3 243 344
13 342 601
3 011 425
101 409 478

40 019 055
4 197 225
17 014 362
3 833 087
28.24
17 655
8 055
420 099
24.99
28.24
51 684
23 580
1 229 796
1 649 895
22.59
13 180
6 057
251 475
19.99
22.59
37 648
17 303
718 349
969 825
338 585
150 451
15 343 498
1 024 392
455 281
52 339 950
67 683 449
Sum
Digital
distribution
Video game consoles
Average price
Unit
sales
Unit
Europe
sales in
and the
the US
rest
403 647
174 523
49 373
22 304
Sum

Appendix 20 Sales forecast for CyberPunk 2077
PC
All values in USD
the US
average
price
Timeline
Classical retail
distribution
Unit sales
Europe and
rest
Unit sales in
the US
Sales
the US
average
price
Europe
and the
rest
average
price
Unit sales
Europe and
the rest
Unit
sales
inthe
US
Sales
Total
Revenues
2018
59.99
67.79
540 000
230 000
23 055 891
59.99
79.09
1 570 000
660 000
55 032 969
78 088 860
2019
49.99
56.49
170 000
71 000
6 009 740
49.99
67.79
480 000
200 000
14 267 409
20 277 149
710 000
301 000
29 065 631
2 050 000,00
860 000
69 300 378
98 366 010
2018
59.99
67.79
250 000
110 000
14 109 648
59.99
79.09
740 000
310 000
45 792 187
59 901 835
2019
49.99
56.49
87 000
37 000
4 046 870
49.99
67.79
250 000
100 000
12 989 718
17 036 588
337 000
147 000
18 156 518
990 000
410 000
58 781 905
76 938 424
Sum
Digital distribution
Video game consoles
Europe and
the rest
average
price
Sum

Appendix 21 Average fraction of SGP received by the CDP
Europe
North America
XBOX ONE /
Playstation 4
PC
XBOX ONE /
Playstation 4
PC
Classical retail distribution
42%
31%
55%
41%
Digital distribution
56%
56%
70%
70%
Source: The team estimate, the company data.

Appendix 22 Platforms share in the next years
2013
2014
2015
2016
2017
2018
2019
2020
PC/Mac
10
TV consoles
31
29
27
25
24
24
24
24
PC/Mac share
24.4%
23.7%
25.0%
24.2%
25.0%
25.0%
25.0%
25.0%
TV consoles share
75.6%
76.3%
75.0%
75.8%
75.0%
75.0%
75.0%
75.0%
Source: Newzoo,the team estimate.
23
Appendix 23 Suggested and estimated retail price for the Witcher series games
$70
The Witcher
$60
$50
The Witcher 2
$40
The Witcher 3
rational
$30
$20
$10
$0
day m4
one
m8 m12 m16 m20 m24 m28 m32 m36 m40 m44 m48 m52 m56 m60 m64 m68 m72
Source: Steam, the team estimate.
Appendix 24 Sales in the first 10 weeks.
Game
Call of Duty:
Modern Warfare 3
God of War:
Ascension
Tomb Rider
Platform
Appendix 25 Sales in the first year.
Sales in the
first week
Sales in the
first 10
weeks
Quotient
Game
Platform
Sales in
the first
10 weeks
Sales till
the first
year
Quotient
PS3
5 091 237
10 213 861
201%
God of War: Ascension
PS3
1 169 381
1 765 174
66.25%
PS3
676 538
1 169 381
173%
Tomb Rider
PS3
1 433 701
2 130 650
67.29%
The Last of Us
PS3
3 131 268
4 374 477
71.58%
Middle Earth: Shadow of Mordor
PS4
1 579 436
1 969 566
80.19%
InFAMOUS: Second Son
PS4
1 522 589
2 172 439
70.09%
Watch Dogs
PS4
2 940 880
3 662 514
80.30%
PS3
653 396
1 433 701
219%
The Last of Us
PS3
1 319 206
3 131 268
237%
Middle Earth:
Shadow of Mordor
PS4
565 699
1 579 436
279%
Watch Dogs
PS4
1 970 969
2 940 880
149%
Destiny
PS4
3 657 685
4 548 845
80.41%
Destiny
PS4
2 260 312
3 657 685
162%
Mass Effect 3
Xbox360
2 101 128
2 569 500
81.77%
Call of Duty:
Modern Warfare 3
Xbox360
6 667 933
10 803 622
162%
Average
74.7%
Median
75.9%
Average
Median
197.8%
186.7%
Source: VGChartz.
Quotient is calculated as a division of Sales in the first 10 week by Sales in the first
week.
Source: VGChartz;
Quotient is calculated as a division of Sales in the first 10 week by Sales in the
first week.
24
Appendix 26 Sales outside the US & the EU (in %)
Game
Platform
Call of Duty: Advanced Warfare

Destiny
FIFA 15
Titanfall
InFAMOUS: Second son
Middle Earth: Shadow of Mordor
Watch Dogs
The Last of Us
Tomb Raider
Diablo III
Sims 4
StarCraft II: Heart of the Swarm
Average
XboxOne
XboxOne
XboxOne
XboxOne
PS4
PS4
PS4
PS4
PC
PC
PC
PC
Sales outside the

US & the EU (in
%)
8.1
7.9
11.2
7.1
23.2
24.9
26.4
24
30.1
12.8
14.2
12.5
17.6
Source: VGChartz.
25
Appendix 27 Average Rate of Unlicensed Software Use
Appendix 34 Piracy and unauthorized copying
70%
60%
50%
40%
30%
20%
10%
0%
Source: Business Software Alliance (BSA).

Appendix 28 Global Self-Reported Piracy- "How often
do you acquire pirated software or software that is not
fully licensed?"
Always
Mostly
Occasionally
Rarely
Never
Refuse
Source: Ninth annual BSA Global Software Piracy

Study 2011.
Appendix 29 Most Pirated Games on Web in 2010 (in
millions)
Piracy and unauthorized copying is a persistent problem in an entertainment industry. The biggest
risk of unauthorized copying is connected with game developed on PC. Downloading and
installation of unlicensed console game from technical point of view is much harder and almost
impossible in wider scale.
So far, the effort to control piracy is unsuccessful. Companies in the industry take technical steps
to make the piracy more difficult. Insufficient legal protection with the enforcement of intellectual
property rights could be costly and time consuming, especially in countries where protection of
this kind of rights is limited. Society of developing countries benefit from a less protective law
because software are mostly developed by other countries. Governments do not have an
motivation to enforce strive intellectual property rights. According to Go-Gulf Online Piracy in
Numbers 2010 more than 75% of PC have installed at least 1 illegal software and about 95% of
music downloaded online is illegal. Finally, website with non-copyrighted content receive more
than 146 Million visitors per day. According to Ninth annual BSA Global Software Piracy Study
2011 the biggest drivers of software piracy are emerging economies. Developing countries are
responsible for 56% of the worlds new PC shipments in 2011. In those countries, the rate of
unauthorized software is the highest. We assume that main factors having impact on piracy are:
Public Education and Attitude to Intellectual Property Physical and Intellectual

Property are treated differently in relation to theft. According to Go-Gulf Online Piracy
in Numbers 2010 70% online users find nothing wrong in online piracy.
Social welfare and Country Development Average rate of unlicensed software is

very different among countries. Correlation between economics development and
piracy is observed. On the other hand, differences between countries on similar stage
of development are significant. The rate of unlicensed PC software installations in
Poland is 51%, in comparison to 37% in Slovakia and 34% in the Czech Republic.
Effective Law Legal frameworks are a key point in IP protection. Companies need to
enforce their rights in a quick and inexpensive proceedings.
IP Protection Policy Countries governments need to support IP protection to make

it effective. We believe that in many countries, especially in developing ones,
governments do not have an incentive to provide effective IP protection because most
of application are delivered by foreign companies.
Piracy and unauthorized copying of The Witcher 2
The unauthorized copying PC version of the Witcher and the Witcher 2 negatively affected the
company revenue. According to the Company estimation about 4.5 million of unauthorized copy
Prototype
of the Witcher 2 was downloaded via BitTorrent. CDP take some legal actions against users who
Starcraft 2
are suspected to illegally download game. the Company DRM-free policy could be questionable.
Sims 3
CDP claim that don not want to punish legal customers and introduce advanced copy protection
Mass Effect 2
systems. The main competitors use DRM tools to protect their games from unlicensed copying.
Mafia 2
This policy create some doubts among gamers and could negatively affected CDP perception. In
Battlefield: Bad Company 2
our view, for gamers quality of game and price are the most important factors which influence
Call Of Duty: Modern Warfare 2
decision about purchase and introduction of DRM will not damages trust to CDP.
Call Of Duty: Black Ops
RPG games have a bigger share in PC game market than in console game market, 12% in
comparison to 6%. We think that this proportion should be stable over time, in shooter or action
0
1
2
3
4
5
games, suitability of keyboard as playing device is limit, in other game type like strategy gamers
prefer PC. In our view, company could improve their revenue by introduction additional IP
Source: Go-Gulf Online Piracy in Numbers 2010.
protection. According to official announcement CDP is currently working on The GOG Galaxy
Appendix 30 Most Pirated Movies on Web in 2010 (in which we assume could limited problem of unlicensed copying.
Street Fighter IV
Need for Speed: Shift
millions)
Our forecast of future global trend in piracy
Salt
The Hurt Locker
Sherlock Holmes
Green Zone
Clash of Titans
Iron Man 2
Shutter Island
Inception
Kick-Ass
Avatar
10
15
We think that in long run piracy in the game industry will have trend downward but in
short run percentage of unlicensed copy could increase.
Fast developing country from Asia will become important game market as well as
software producer. They will need to improve IP protection in order to stimulate
domestic software producer market.
Global growth will lead to limitation of piracy.
Games will become more interactive with wider usage of move controllers which force
gamers to play on consoles which are not negatively affected by piracy problem
In short run new PC shipments in developing countries could have negative impact on
percentages of unauthorized copying of game.
20
Source: Go-Gulf Online Piracy in Numbers 2010.
26
Appendix 31 Game Developer Salary
Appendix 35 IT trends in Poland

Game Developer Average
Annual Salary (in dollars)
USA
83 060
Europe
46 232
Canada
71 445
Source: Game Developer Salary Survey 2014.
According to the Report Central and Eastern European IT market Trends and Forecast
Pmrpublications.com, IT market in Central and Eastern Europe (CEE) will increase by 4.5 %
annually in 2014-2018%. The CEE countries seem to be quite homogenous when it comes to the
IT market trends and tendencies. We assume that it could have an impact on salary in whole IT
industries. Increase in salary could negatively affect CDP but we believe that cost of labor in IT
industries will be increasing also in other countries/However we presume that finally the term of
trade will stay at the same level.
Forecasts for Polish IT labour market
Survey of International IT Companies Located in Poland

Appendix 32 Salaries in IT sector
Competitive Advantages of Polish IT Markets

Average Annual Salary (in
dollars)
1.
2.
3.
4.
5.
Lower cost of labor

Highly qualified workforce
Highly motivated staff (IT is a hobby for many workers)
Similar culture
Geographic location of Poland in the middle Europe
Programming
92 962
Art and Animation
75 780
Game design
73 386
Polish IT labour market
Production
85 687
Audio
83 182
Quality assurance
47 910
Business
102 160
In Poland, every year, about 14 000 students graduate from Information Technology Department
with IT specialist diploma. In recent years number of students graduated from IT department is
declining. During last year number of students who found a job during studies and therefore have
not completed it, was growing.It was one of the reasons which have negative impact on number
of graduate with diploma. In order to change this trend Polish Ministry of Science and Higher
Education set a special program to increase number of IT students. Both public and private
schools could get additional funds from ministry, for each IT student.. Obtaining scholarship for
IT studentsis much easier. We assume that this policy should have positive impact on number of
IT student in long term. According to GUS data, in 2012 number of students of IT department
stopped declining.
Source: Game Developer Salary Survey 2014.
Appendix 33 Salaries in IT industry in Poland

Median of Gross
Salary in PLN
Competitive Advantages of the CDP

Monthly
Annual
CEO of IT department
Manger of IT
department
14 500
174 000
8 950
107 400
IT Consultant
7 000
84 000
SAP Consultant
6 550
78 600
WebMaster
3 550
42 600
Game graphics
3 000
36 000
The cost of labour in game developing industries are much lower in Poland in comparison to costs
inEurope and especially on the USA Market. In our view, game developers who want to work on
world-renowned games in Poland, need to work in CDP.Other Polish studios create games in
much lower quality and their titles are not as well-known as the Witcher. According to Polish
Information and Foreign Investment Agency 44% of graduates declare that they do not consider
working abroad. In our view, in next years lower labour costs will be constant competitive
advantage of CDP in comparison to game developers located in the USA. According to the Survey
of International IT Companies Located in Poland - workforce in Poland is well-qualified and highly
motivated. Polish students get an excellent results in international competitions.
List of Polish students successes in international competition
Source: Pracodawcy IT Computerworld, 2013
University of Wroclaw
Final of International Collegiate Programming Contest 2014
University of Warsaw
1st place in Google Code Jam 2012
2nd place in International Collegiate Programming Contest 2012
1st place in International Collegiate Programming Contest 2007
Poznan University of Technology
1st place (twice), once 2nd and 3rd place in the IEEE Computer Society Annual International
Design Competition- during the years 2000-2005
1st place in Imagine Cup organized by Microsoft in the years 2005, 2006, 2009
2nd place in Imagine Cup in 2007
3rdplace in Imagine Cup world finals 2008 and 2010
1st place in Imagine Cup Innovation Accelerator in 2008
5th place in International Collegiate Programming Contest in 1999
1st place in International Collegiate Programming Contest in 1998
27
Appendix 36 Company strategy versus market trends

We highly grade the companys management and strategy. In our view, CDP effectively anticipated to previous and current market trends. We assume
that the key trend are: According to the Report Central and Eastern European IT market Trends and Forecast Pmrpublications.com, IT market in
Central and Eastern Europe (CEE) will increase by 4.5 % annually in 2014-2018%. The CEE countries seem to be quite homogenous when it comes
to the IT market trends and tendencies. We assume that it could have an impact on salary in whole IT industries. Increase in salary could negatively
affect CDP but we believe that cost of labor in IT industries will be increasing also in other countries/However we presume that finally the term of trade
will stay at the same level.
Forecasts for Polish IT labour market
Survey of International IT Companies Located in Poland

Competitive Advantages of Polish IT Markets
1.
2.
3.
4.
5.
Lower cost of labor

Highly qualified workforce
Highly motivated staff (IT is a hobby for many workers)
Similar culture
Geographic location of Poland in the middle Europe
Polish IT labour market

In Poland, every year, about 14 000 students graduate from Information Technology Department with IT specialist diploma. In recent years number
of students graduated from IT department is declining. During last year number of students who found a job during studies and therefore have not
completed it, was growing.It was one of the reasons which have negative impact on number of graduate with diploma. In order to change this trend
Polish Ministry of Science and Higher Education set a special program to increase number of IT students. Both public and private schools could get
additional funds from ministry, for each IT student.. Obtaining scholarship for IT studentsis much easier. We assume that this policy should have
positive impact on number of IT student in long term. According to GUS data, in 2012 number of students of IT department stopped declining.
Competitive Advantages of the CDP

The cost of labour in game developing industries are much lower in Poland in comparison to costs inEurope and especially on the USA Market. In
our view, game developers who want to work on world-renowned games in Poland, need to work in CDP.Other Polish studios create games in much
lower quality and their titles are not as well-known as the Witcher. According to Polish Information and Foreign Investment Agency 44% of graduates
declare that they do not consider working abroad. In our view, in next years lower labour costs will be constant competitive advantage of CDP in
comparison to game developers located in the USA. According to the Survey of International IT Companies Located in Poland - workforce in Poland
is well-qualified and highly motivated. Polish students get an excellent results in international competitions.
List of Polish students successes in international competition

University of Wroclaw
Final of International Collegiate Programming Contest 2014
University of Warsaw
1st place in Google Code Jam 2012
2nd place in International Collegiate Programming Contest 2012
1st place in International Collegiate Programming Contest 2007
Poznan University of Technology
1st place (twice), once 2nd and 3rd place in the IEEE Computer Society Annual International Design Competition- during the years 2000-2005
1st place in Imagine Cup organized by Microsoft in the years 2005, 2006, 2009
3rdplace in Imagine Cup world finals 2008 and 2010
1st place in Imagine Cup Innovation Accelerator in 2008
5th place in International Collegiate Programming Contest in 1999
1st place in International Collegiate Programming Contest in 1998
Concentration of Revenue Among Top Titles

Hit titles earn a significant portion of total revenue in each segment. According to The NPD Group, in 2013 the Top 10 bestselling titles accounted
for 38% of total sales in the industry in the USA in comparison to 30% in 2012.
Double-digit growth in digital distribution segment
Recently, Digital Distribution is growing at two digits number. According to Entertainment Software Association and the NPD Group/Retail Tracking
Service in 2013, total digital distribution accounted for 53% of total distribution in comparison to 29% in 2010.
The highest number of sales are reported by franchise
The world-renowned game developer create franchise. It built loyalty to brand and minimized costs of advertising as well as had a significant impact
on game sales. Gamers who were satisfied by previous game are more likely to buy a new one for higher prices. Quality of game is less crucial in
case of franchise than when it comes to a new title.
28
Rapid growth in mobile phone game market

According to Global Game Market 2013-2017 Report by Newzoo mobile phone game market will be growing at CAGR 15.1% to 2017.
In our view, CDP is very flexible and easily adapts to market trends. Moreover the company has forecasted correctly future trends and it tries to take
advantage of upcoming market opportunities.
Company strategy
Worldwide digital distribution of videogames via the GOG.com platform which
currently ranks as the second most popular independent distribution platform in
the PC and Mac segments. The GOG was established in 2008.
Triple-A Video Games
Development and distribution of triple-A videogames, with an
extensive development budget, top-of-the-line production values and
excellent marketing potential.
Cyberpunk 2077
Role-playing game targeted for the PC and consoles. Based on Mike
Pondsmiths Cyberpunk cult classic game, with over 5 millions of fans, 70% of whom
live in the USA. The Cyberpunk 2077 will be a new franchise of CDP but in order to obtain saga effect the company got the right to use old
Cyberpunk trademark
The Witcher Battle Arena
Company is currently developing a game designed for mobile phones. In our view, CDP is testing the market. We assume that over following years
companys leading game segment will remain developing triple-A game.
29
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 companys 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 Society Poland, CFA Institute or the CFA Institute Research Challenge with regard to this companys stock
30

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CFA Institute Research Challenge

Local Challenge CFA Society of Poland

[IT, Video Game Development, Digital Distribution]

Team J Student Research

Current Price PLN 16.16

Target price PLN 16.27 (+0.3%)

Main revenues growth drivers:

On-going triple-A games

Entrance into the new

Steady growth in sales via

A very good reputation of The Witcher saga.

The CD Projekt stock price

Source: The company's data, The WSE's website

Figure 1 Structure of CD Projekt Capital Group

Source: The company data.

Source: The company data.

Source: The company data.

Source: The company and the WSE data.

Maintenance of the customers loyalty - this strategic objective is going to be achieved

Development of innovation - as a digital distribution platform, the company has

Commercialization of proprietary technology - starting to license the game

Figure 5 Projects co-financed by the European Regional

Members of a supervisory board - well-educated and experienced professionals: a

Shareholder Rights - one-share-one-vote policy, minority shareholders are authorized to

Source: The company data.

Figure 6 Expected Global Game Market in 2014

Game industry revenue (in bn USD)

Gamers (in mln)

Video games development

Source: McKinsey&Companys, Global Media Report

Figure 8 Global Games Market, 2013-2017

Advantage of differentiation of buyers and products substitutes

65% 71% 68%

65% 66% 64%

Progressive internationalization and increasing number of competitors

Source: The team estimate.

The company is consistently implementing its strategy of internationalization. In accordance with

Mobile Game Segment

Figure 11 Competitive positioning of GOG.com

Source: The team estimate.

Source: The 2014 Essential Facts About the Computer

Digital Distribution is growing at two digits number. According to Entertainment Software

Share of Digital Distribution

Source: The team estimate.

Figure 14 Global Games Market 2012-2017

Sustainable improvement of financial position

Total Games Revenues (in bn)

Possible Investment Risk

Mobile Game Revenues

Hold the Witchers producer

Source: The team estimate, Stooq.pl. Data as of January

Industry overview and its prospects

Table 2 Total Sales until 2020 forecast for the Witcher 3

Doubtful long-term increase

Source: The team estimate.

Source: The team estimate.

Video games development

Figure 16 Estimation of Sales as a percentage of Total

Source: The team estimate, VGChartz.com.

Figure 17 GOG.com Sales

2014E 2015E 2016E

Source: The team estimate.

Source: The team estimate.

Equity Risk Premium