China Mobile Games & Entertainment in ADS offering

The Chinese mobile gaming company wants to use the $100 million proceeds to grow overseas and expand its product offering.

China Mobile Games & Entertainment aims to raise $100 million in a follow-on share offering, the latest mainland technology company to seek fresh capital from equity markets.  

Bankers kicked off the roadshow in the US on Monday. Some 3.4 million primary American depository shares will be on offer, with an overallotment option of 516,300 shares, or 15% of the base offering, according to a term sheet. The lock-up is 90 days.

Those bookrunning the deal will spend two days in New York and one in Boston before travelling to the West Coast to meet with long-only institutional investors and hedge funds, a person close to the deal told FinanceAsia, noting that those involved expect decent demand from both China- and technology-focused funds.

The deal will price Thursday, March 20 after the US market close.

The company – one of China’s largest mobile gaming companies, with operations in Shenzhen, Beijing, Guangzhou and Chengdu – plans to use the proceeds raised to help develop games and to acquire game licences and intellectual properties.

“In terms of [the] product pipeline, CMGE expects to launch approximately 15 self-developed social games and at least 30 party-social games with exclusive licences,” Vice Chairman Hendrick Sin said in the company’s earnings statement. “We are very excited about our pipeline, which includes RPG [role-playing games), card and poker games.”

At the moment, Nasdaq-traded CMGE’s portfolio consists of 770 games, including 645 single-player and 72 social games. The latter are mainly developed for Android and iOS-based smart phones. 

CMGE will also use the money garnered from the follow-on share offering to “expand significantly" in other Asian markets, including Taiwan, Hong Kong, Korea and Southeast Asia.

Its distribution network consists of a proprietary game-centre distribution platform, handset pre-installation, mobile advertisements and telecom operators.

CMGE on March 4 reported revenues of Rmb353 million ($58.3 million) for 2013, an 88% rise on the Rmb187.6 million generated in 2012. Net income for the full year was Rmb26.8 million compared with a net loss of Rmb14.5 million in 2012.

Some 7.7 million users paid for social games in 2013, an astonishing jump from the 303,613 user payments recorded in 2012. But single-player users dropped 57% to 13.7 million last year from 31.7 million the year before.

China Internet

China is going through a technology boom as institutional investors continue to eye mainland internet companies with enthusiasm. China’s largest Twitter-like service Weibo, owned by New York-listed Sino Corp, aims to raise $500 million ahead of its US initial public offering, while e-commerce giant Alibaba Group, which on Sunday unveiled its decision to list in the US instead of Hong Kong, is expected to retrieve $15 billion.

China’s internet story is ultimately about mobile phone growth, a trend that should benefit companies like CMGE, a developer, operator and publisher of mobile games.

Smart phone shipments in China jumped 86.3% year-on-year in 2013, while 3G subscriber growth increased by 78.8%, according to Nomura research. Higher smart phone penetration, faster internet connections and better game content offerings, in turn, are all helping to drive explosive growth in the mobile games market.

Nomura forecasts that the mobile games market in China will grow at a compound annual growth rate of 59% from 2014 to 2018, surpassing the web-based games market some time in 2014 and the PC client-based game market in 2018. 

“Mobile gaming has proven to be well accepted by gamers and demonstrated strong monetisation. Given that mobile phones have higher penetration levels than PCs, we believe mobile gaming has a chance to surpass the PC-based game market,” Chao Wang, a China internet analyst at Nomura, said. “Mobile game platforms are the key beneficiaries.”

But competition is increasing for game developers. Production costs are low and new developers are entering the market. According to Nomura, it is possible for three people to develop a marketable mobile game within a three-to-six months period.

“Mobile game developers are seeing intensifying competition due to relatively low-entry barriers. Mobile game publishers, as middle men between platforms and developers, can benefit from the trend, but will see consolidation and diversification,” Wang said.

Despite the influx of new game developers, Wang expects CMGE – as well as other established players Chukong Technologies, and FL Studio Mobile – to gain market share in the next two years.

CMGE shares are up 30% so far this year and have gained 85% since it first offered American depositary shares on Nasdaq in September 2012.

Tencent is another Chinese technology company market participants are keeping close tabs on.

Nomura forecasts that Tencent, which has mobile game platforms Weixin and QQ and a market cap of over $100 billion, will “capture the majority of the incremental market in 2014 and become the undisputed leader in all developer, publisher and platform markets”.

Barclays, Credit Suisse, Jefferies and Nomura are joint bookrunners on the CMGE deal.

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