Facing headwinds

CMGE presses ahead with potential down-round HK IPO

The Shenzhen-based mobile game publisher returns to Hong Kong four years after take-private. However, it may yet fail to achieve the valuation it had when delisted.

CMGE Technology Group hopes to overcome some of the bearish sentiment surrounding the mobile gaming sector in Hong Kong by pressing ahead this week with an initial public offering worth up to HK$1.3 billion ($166 million).

The Chinese, Shenzhen-headquartered mobile game developer started collecting institutional orders for its 461 million-share deal on Thursday, while retail subscriptions are slated to begin on Saturday, according to a source familiar with the situation. Both tranches are expected to close on October 24.

CMGE’s Reg S/144A transaction is being marketed at HK$2.19 to HK$2.83 per share. The company will have a post-money free float of 20.4% – or 23.4% if the 15% greenshoe option is fully exercised.

Completion of the IPO will mark the return of CMGE to the stock market after a four-year absence. The company, previously known as China Mobile Games and Entertainment, listed on Nasdaq in September 2012 and was subsequently taken private in August 2015 at an implied valuation of $743 million.

CMGE will fail to match that valuation if it cannot price its upcoming Hong Kong listing near the top of its indicative price range. Based on this price guidance, the company has an implied market capitalisation of $632 million to $813 million.

A so-called down round IPO – in which a private company sells shares at a lower price than the previous financing round – is rare. And it is particularly rare for a company that is returning to Hong Kong from the US, given the premium valuations typically enjoyed by companies listed on the city’s bourse.

The situation shows just how much local investor attitudes to the mobile gaming sector have changed after a boom in online gaming IPOs in 2013 and 2014.

Back then, several mobile game publishers –including IGG, Boyaa Interactive and Forgame – sold shares to the public and experienced a huge lift in market valuations within months. It was a time when mobile games were becoming highly popular as smartphone penetration increased and mobile games such as Candy Crush and Clash of Clans were taking a large slice of the market from traditional gaming operators who were more focused on desktop and laptop computers and on separate consoles. 

However, the boom times for these new mobile game developers was short-lived and many saw their share prices plummet from 2015 and onwards, when investors began to question their business models. Many of those who failed relied heavily on one particular game, making them vulnerable to rapidly changing consumer tastes in the world of mobile and free-to-play games.

So Hong Kong-listed mobile game developers have fallen out of favour among investors, judging by both their share prices and trading values. Nearly all of them – with the exception of IGG – are trading below their respective listing prices. And none has an average three-month daily trading value of over $1 million.

VALUE PROPOSITION

CMGE hopes to be an exception since its gaming focus is primarily on games developed around well-known cultural products and art works – so-called intellectual property-based games.

These games feature icons or characters from popular animations, novels and motion pictures that already have a significant fan base and differ from proprietary games, which are developed from scratch.

The company said it now possesses 68 video and personal computer game IPs, including Legend of Sword and Fairy and Xuan Yuan Sword, two hugely-popular video game and TV drama series in the Chinese-language world.

It also claims to have, among all Chinese independent mobile game publishers, the largest IP reserve that can be used to develop IP-based games in the future. It cooperates with over 400 third-party publishing channels, allowing it to publish on all major platforms in China.

CMGE also hopes that its relatively large business scale will help it to attract more investor attention. Should it list at the top of its indicative price range, the company will be valued only slightly below IGG, the largest Hong Kong-listed pure-play mobile game publisher. 

Shares of CMGE are slated to begin trading on October 31.

CICC and BNP Paribas are joint sponsors of the IPO.

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