Chinese mobile games: fit to burst?

August 1, 2013 Leave a comment

Chinese mobile games: fit to burst?

Jul 31, 2013 4:23pm by Lydia Guo

Shanghai is having a particularly hot summer this year but that didn’t stop game lovers by the tens of thousands from queuing up to get into ChinaJoy 2013 – The 11th China Digital Entertainment Expo & Conference. “Everyone was talking about mobile games this year,” says Xue Yongfeng of consulting firm Analysys. He says China’s mobile games industry is booming – creating a bubble that’s likely to burst next year. The mobile games industry developed quickly in 2012. Sun Shoushan of China’s Administration of Press, Broadcasting Stations and Radio said in a speech at the event that revenues had surged more than 90 per cent to Rmb3.24bn ($530m); in the first half of this year, revenue from mobile games more than doubled.Numbers from consulting firms are even bigger. Analysys estimates that total revenue from mobile games reached Rmb5.5bn last year, and will overtake Rmb10bn this year.

IDC, another consulting firm, says the compound growth rate of China’s mobile games market over the next five years could reach 24 per cent, faster than the overall games industry’s rate at 15.57 per cent. “With the popularity of smart phones, mobile games will be the main battlefield, ” it said.

The battlefield is indeed on fire, with numerous acquisitions, various investors flocking in and driving share prices to rocket high levels, and tens of thousands of mobile game developers competing with each other and hoping to be bought by investors.

Baidu’s recent $1.9bn acquisition of 91 Wireless, the biggest deal in China’s internet industry, had a lot to do with 91 Wireless’s advantages in mobile games, besides Baidu’s desire for an entry point to the mobile world, says Ken Xiao, chief executive of China Mobile Game & Entertainment Group, a NASDAQ listed mobile gaming company.

More than Rmb10bn has been spent on relatively smaller deals between listed companies and mobile games developers this year. For example, Huayi Brothers Media Corporation bought 50.88 per cent of Yinhan Technology Limited for Rmb672m, and Ourpalm Co Ltd acquired Dovo Technology Inc for Rmb810m.

Share prices of mobile games developers listed in ChiNext, China’s NASDAQ, have surged at jaw-dropping speed, in sharp contrast to China’s A-share market. Shenzhen ZQGame Co Ltd has gained more than 190 per cent this year, putting its P/E ratio at a stratospheric 261 times; Ourpalm’s P/E ratio is 160 times, having risen more than 300 per cent; Beijing Bewinner Communications Co Ltd surged 127.78 per cent this year, and has a P/E ratio of 87 times.

“There certainly is a bubble in the share prices, ” says Xiao. He says this is a result of speculation – but also reflects the fact that Chinese investors have more understanding of the mobile games industry in China, given that his NASDAQ listed CMGE is trading at a P/E ratio of a mere 56 times.

But the reality is that, for game developers and operators, it’s just too early to call the winners. Analysts at Citi note that the mobile game market is far more fragmented and crowded than traditional web and MMO (massively multiplayer online) games:

Competition between developers is extremely fierce, where the top 20 games are shared by 19 different developers.

There are tens of thousands of mobile games developer companies in China. Xue Yongfeng at Analysys says all kinds of capital is piling into the sector – venture capital, angel capital, even people used to investing in mines.

“When the bubble bursts, less than four hundred companies might survive, but the burst will be good for the industry to grow in the long run,” he says.

Other problems in the industry include too many copycats and too few innovative games that have the potential to be long-lasting hits like Angry Birds and Candy Crush.

No matter what the fate of game developers, distribution channels and platforms such as Tencent, Qihoo and 91 Mobile Assistant will mostly benefited from the explosive growth of mobile games. Tencent, for example, is preparing to launch a mobile game platform with WeChat, an online instant message service similar to WhatsApp. Its share price has surged 16 per cent this month to a record high.

Filed under TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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