Mobile game operator depends on licenses

| Sunny Tse 5 Nov 2018

China's mobile game giant CMGE Technology is seeking to raise between US$400 million (HK$3.12 billion) and US$500 million in its Hong Kong initial public offering, after delisting from the Nasdaq in 2015.

The Shenzhen-based company invests directly and indirectly in companies that create internet protocol, that appeals to mobile games players. The game operator held licenses over 26 intellectual properties and owned 68 proprietary IPs.

"Look at the giant of the gaming industry now - Tencent (0700), you already can see the prospects of the gaming industry," Francis Lun Sheung-nim, chief executive of Geo Securities says. "This industry has frozen."

China has been the world's largest market for online gaming, making up 45.1 percent of the global online gaming market in 2017. The market in China was worth 214.2 billion yuan (HK$241.93 billion) in 2017, while it is expected to reach 321.5 billion yuan in 2020, according to the Analysys, an independent market research firm.

However, China has reportedly stopped issuing new game licenses so that regulators can restructure how video games are reviewed for violence, gambling, and sensitive topics. The "green channel," used for testing domestic and foreign games, has been closed since August, according to Bloomberg.

"We cannot assure that we will be able to successfully license games developed by third-party game developers and IPs from their owners, or that our licensed IPs will be developed into successful games," CMGE says in the filing.

CMGE only publishes games developed by third parties. Many of them had been developed based on CMGE's licensed IPs. An IP licensing agreement generally has a term of three to five years. Ten out of 26 licensed IPs and 20 out of 70 game licensing agreements IPs will be subject to renewal by end 2019.

The company acquired 51 percent equity interest in Beijing Softstar, a former subsidiary of Taiwan Softstar, as a result, it has five series of popular IPs, namely Legend of Sword and Fairy, Xuan Yuan Sword, Monopoly, Stardom and Empire of Angels. The firm also acquired Wenmai Hudong, an IP-based mobile game developer.

Some of the games launched by CMGE have performed well. The Road of the Strong, and Heaven Sword and Dragon Saber achieved gross billings of 62.5 million yuan and more than 98 million yuan respectively, in the first month after launch. CMGE Mobile Tech won "Global Top 50 Publisher by Apple" after launching Eternal Myth in 2017.

Major customers of CMGE are game developers. Its largest customer accounted for up to 25 percent of revenue in the six months ended June 30, 2018.

Gross profit for the six months ended June 30 this year increased by 23.53 percent year-on-year, to 238.43 million yuan. Gross profit margin grew 1.9 percentage points to 35.5 percent during the same period.

In 2016, CMGE started to cooperate with popular social media networks including Baidu, iQIYI, and Tik Tok to place advertisements. After a year, CMGE cooperated with other brands including Mobike, Didi Chuxing and Meituan Dianping (3690) to attract more online users.

Net proceeds from the float will be primarily used for expansion and to improve the IP game publishing and development business. Another part of the net proceeds will be used for mergers and acquisitions.

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