Small game player faces high costs

Jiu Zun Digital Interactive Entertainment Group, a Chinese mobile game maker, is planning to list in Hong Kong on March 17 to raise about HK$227 million.

The Guangzhou-based company attracted renowned American veteran investor Jim Rogers as one of the pre-IPO investors, who subscribed to the company's zero-coupon convertible bonds through AE Majoris Tech. The retail portion of its IPO was oversubscribed by at least four times.

Jiu Zun has adopted a pricing flexibility mechanism for its initial public offering, which allows it to price the deal 10 percent below the bottom of the indicative price range, due to unfavorable market conditions, it said.

The company mainly develops and operates mobile games, and also distributes e-magazines, comics, and music. Mobile games contributed more than 86 percent of total revenue for the first nine months last year.

Jiu Zun is a small player in the mainland mobile game market, with only 0.1 percent market share by revenue in 2018. The company had shifted focus to developing boutique mobile games to follow the industry trend. It launched its first multi-player mobile game in January 2019 after focusing on single-player casual mobile games in the past three years.

But operating multi-player games means the firm has to pay higher costs for license fees, service fees for distribution channels and technology support, which dragged down gross profit margin to 36.8 percent for the January-September period last year from 43.6 percent in 2018.

The cost burden also was passed to customers as the company charged higher unit prices on virtual items in its new multi-player game. The average revenue per paying user grew to 23.16 yuan (HK$25.88) for the first nine months last year from 15.41 yuan in 2018.

China's online industry is facing high policy risks. In 2018, the regulator's nine-month freeze on gaming approvals put a huge strain on the earnings of game developers.

Jiu Zun only launched 20 new games in 2018, 30 percent less than a year before. Its revenue from mobile games slumped by 40 percent year-on-year to 90.61 million yuan in 2018 as average monthly paying users fell by 36.84 percent to 1.2 million.

During the period, Jiu Zun used accounting maneuvers to avoid a bigger decline in net profit, which rose 2.03 percent to 51.67 million yuan. The net profit was contributed by the reversal of the impairment of trade receivables of 17.27 million yuan in 2018, compared with impairment losses of 3.81 million yuan and 2.09 million yuan in 2016 and 2017 respectively.

For the first three quarters last year, Jiu Zun's revenue rebounded by 41.82 percent to 170.79 million yuan, after China ended the freeze on game licensing by the end of December 2018. But its net profit dropped by 31.93 percent to 30.93 million yuan, due to listing expenses and incurring impairment losses of trade receivables.

Jiu Zun also warns its net cash outflow from operating activities may affect its liquidity as it had net cash used in operating activities of 96.78 million yuan for the first nine months last year.

The firm said it is mainly because of the repayment of 51.6 million yuan to the 28 subsidiaries, the increase in deposits paid for licensing and the increase in trade receivables due to delay in settlement from major settlement agents and distribution channel providers.

It said its business has been less affected by the Covid-19 virus as users could play its games at home. But if the epidemic lingers and the government continues to limit the working days, the firm may delay launching new games as its research and development team staff would not be able to access sophisticated systems for graphic design and audio effects, it said.

Jiu Zun plans to use the net proceeds to expand market share in mobile games, obtain licensing rights of popular entertainment properties to develop boutique mobile games, enrich digital media content as well as strategic acquisitions and partnerships with the complementary developers.