Hong Kong has always been a distant second to New York for Chinese technology firms, which prefer more mature US investors to a less predictable environment in Asia. But the market could be quietly gaining some important momentum in the gaming space, with word of two new listing plans from the sector. The first of those has game developer Ourgame filing for a listing to raise up to 750 million yuan (US$120 million) in Hong Kong, while in the second initiative Giant Interactive (GA.US) will reportedly seek a float in the former British colony after a delisting in New York.
Both Ourgame and Giant are almost certainly encouraged by the meteoric performance of Hong Kong-listed Tencent (00700.HK), China’s biggest online game company. Tencent also happens to be China’s largest listed internet firm; its market value of around US$140 billion is probably equal to the value of all the many US-listed Chinese tech companies combined. But Ourgame might also want to take note of a more similar peer, game developer Forgame (00484.HK), whose shares haven’t performed quite so well since it listed in Hong Kong last year.
All this highlights the fact that the gaming sector has become a difficult one for most operators and developers despite its huge potential. Only industry leaders Tencent and NetEase (NTES.US) have been able to perform consistently well in the space. Other second-tier players like Giant and Shanda have spottier records, and their shares largely languished in New York before both companies ultimately decided to privatize.
According to the latest headlines, Ourgame, which develops card- and tile-style games, has made its first formal filings for a Hong Kong listing, including its HK$940 million fund-raising target and an indicative price range of HK$3.70 to HK$4.80. One of the company’s cornerstone investors for the offering is People.com (603000.CN), the website of the Communist Party’s official newspaper the People’s Daily.
The company’s financials look okay but are nothing to get too excited about. Its revenue grew 15 percent to 236 million yuan (US$39 million) last year, while profit grew a slightly faster 20 percent to 35 million yuan. Neither of those numbers is likely to get investors too hyped up, though perhaps the firm may find an audience among smaller buyers looking for exposure to China’s online game market.
Meanwhile, media reports are quoting unnamed sources as saying that Giant Interactive is eying a listing in Hong Kong next year, even as it works to complete its current delisting from the New York Stock Exchange. The reports say Giant’s founder Shi Yuzhu has reached preliminary agreements with his institutional investors for the new Hong Kong listing. That’s not too surprising since many would probably like to quickly recoup some of the nearly US$3 billion they are putting up to take the company private in New York.
But both Giant and Ourgame would do well to look at the case of Forgame, whose shares have performed miserably since it listed in Hong Kong last October. Forgame sold its IPO shares for HK$51 each, and then saw them shoot up as high as HK$70 on initial enthusiasm for the stock. But since then they have moved steadily downward and now trade at HK$28, or 45 percent below their IPO price.
So what’s the moral of this gaming story? Probably the biggest theme is that most gaming developers and operators won’t be able to find a strong audience in either Hong Kong or New York, simply because they can’t post consistently strong growth that most investors want.
But that said, perhaps Hong Kong will be slightly more welcoming to second-tier players like Ourgame and Giant due to the larger numbers of retail investors, who are more driven by hype and short-term growth stories. Institutional investors, by comparison, are more focused on company fundamentals, and are thus less likely to get excited by these erratic growth stories.
Bottom line: Hong Kong could develop as a strong alternative center to New York for Chinese online gaming companies due to the larger presence of retail investors.
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