NetEase, the second-largest Chinese online game developer, has raised HK$21.09 billion after pricing its Hong Kong secondary offering at HK$123 apiece last Friday, representing a 2 percent discount of its previous closing price in New York.

The Nasdaq-listed company saw the retail portion of its initial public offering oversubscribed by more than 300 times, attracting at least 370,000 investors and freezing over HK$190 billion funds through margin financing.

NetEase is the closest competitor of the Hang Seng Index heavyweight Tencent (0700) in the mobile game market, although its US$52.3 billion (HK$408 billion) market value is less than a tenth of Tencent's.

The two companies have dominated China's online gaming markets for years, holding over 75 percent market share in 2019, according to Tianfeng Securities.

Tencent won more than half of the domestic market, while NetEase's market share has fallen to 16 percent in the last quarter of 2019, from 29 percent in early 2017, due to lack of new eye-catching titles and increasing competition from the emerging game companies.

China is the world's biggest gaming market, with US$36.5 billion in revenue in 2019, followed by the United States and Japan. But China's growth rate is slower than the latter two in the past three years, given tightening regulation and economic slowdown, data from Newzoo show.

Founded in 1997, NetEase is the world's second-largest mobile game company in terms of user spending in iOS and Google Play last year, according to App Annie. Online games contributed about 80 percent of NetEase's total revenue, while Tencent's games accounted for less than 35 percent, according to the two companies' first-quarter results.

NetEase is offering over 140 mobile and PC games with major advantages in massively multiplayer online role-playing games (MMORPG) area. Onmyoji, its self-development blockbuster MMORPG launched late 2016, topped China's iOS store grossing ranking several times in the past four years.

The Hangzhou-based company also showed a strong ability to extend the lifecycles of its products. For example, the Westward Journey Online, which debuted in 2001 as a PC game, ranked sixth by user spending among all Chinese mobile games in 2019, according to App Annie.

However, that is still not enough to stand up to Tencent's hottest multiplayer online battle arena (MOBA) Honour of Kings and battle-royale title PUBG Mobile. NetEase's gaming revenue growth also slowed, down from 35.3 percent in the first quarter last year to a mere 5.3 percent in the December quarter.

NetEase has tried to grab market share in MOBA and battle royale filed, developing some games even earlier than Tencent. Its Knives Out and Identity V, launched in late 2017 and early 2018, were all the rage, but still failed to shake the dominant position of Tencent's two flagship titles. That's partly because the tech giant is also operating Chinese top message app WeChat and investing billions of yuan in top live-streaming platforms, that enable it to blur the line between social networking and playing games.

In the first quarter, NetEase posted better-than-expected earnings, driven by rising online gaming profits amid the coronavirus lockdown. NetEase's net profit grew by 49.1 percent to 3.55 billion yuan (HK$3.87 billion) last quarter. Revenues grew by 18.3 percent to 17.06 billion yuan, with online games reporting a 14.1 percent increase.

The gaming sector in China faces huge regulatory risks. Mainland gaming companies had been hit by a nine-month freeze on new game licenses in 2018, pushing more domestic players to expand outside China.

NetEase's overseas game revenue accounted for 11 percent of the total in the first quarter, the highest in its history. "We are more confident and committed than ever to extending our reach internationally," said chief executive William Ding Lei, who controls 44.7 percent stake. China International Capital Corp (3908) predicts overseas game revenue will contribute 30 percent in the next two years.

NetEase plans to use 45 percent of the net proceeds for global expansion, improving game development and design and expanding offerings in overseas markets, such as Japan, the United States, Europe, and Southeast Asia. Around 45 percent of the net proceeds will be used for innovation, and 10 percent will be for general corporate purposes.

But the HK$21.09 billion raised seems just a small amount to the financially strong company, whose total cash and cash equivalents, deposits, and short-term investments balance reached 79.33 billion yuan as of March 31.

NetEase's IPO came as intensified tension between the US and China with the former moving a bill that aims to delist Chinese companies from its stock exchanges.

In its prospectus, NetEase warns that if the bill becomes legislation, it may have a material and adverse impact on the stock performance of China-based issuers listed in the US.

Other US-listed Chinese internet giants, including JD.com, Baidu, Ctrip.com, are lining up for Hong Kong IPOs.

Netease HK stock sale draws mega bucks