Benefiting from positive factors such as the normalization of game versions and the application of AI technology in game development, the performance of major game companies picked up rapidly, market sentiment boosted, and the game sector showed signs of recovery in the capital market.

Huachuang Securities pointed out that the valuation of the game sector has returned to a low level after early adjustments. It is recommended to focus on the upward potential of industry sentiment in the medium term and focus on the practical application and implementation of technological innovation in the gaming field in the long term.

In particular, compared to the A-share gaming sector, the adjustment in the Hong Kong stock gaming sector was more significant. This may provide some noteworthy opportunities for participants seeking value investment.

As an important bridge between mainland investors and the Hong Kong stock market, changes in the Hong Kong Stock Connect list always attract widespread attention from investors. I noticed that recently, there have been some discussions and voices in the market about whether mobile games among leading gaming companies can continue to stay on the Hong Kong Stock Connect.

Let's talk about some of the author's views on this matter, starting with some recent mobile game actions.

1. What are the conditions for “warranty”?

First, we need to be clear. The adjustment of Hong Kong Stock Connect's constituent stocks involves the adjustment of the Hang Seng Composite Index. The Hang Seng Composite Index is the main basis for determining the scope of investment that Hong Kong Stock Connect can make. In other words, Hong Kong stock listed companies must first become constituent stocks of the Hang Seng Composite Index before they can enter the Hong Kong Stock Connect list.

First, according to the rules for excluding constituent stocks from the Hang Seng Composite Index, according to the monthly average market capitalization for the last 12 months, existing constituent stocks with cumulative market capitalization coverage other than 96% are excluded from the Hang Seng Composite Index, and existing constituent stocks within 96% continue to be retained.

Second, the “Implementation Measures for the Shenzhen-Hong Kong Stock Exchange Business of the Shenzhen Stock Exchange” clarifies the adjustment criteria for Hong Kong Stock Connect shares. Hong Kong Stock Connect stocks, which are constituent stocks of the Hang Seng Composite Small Cap Index and are not A+H shares, were transferred out of Hong Kong Stock Connect shares where the average monthly market value of Hong Kong stocks in the previous 12 months was less than HK$4 billion.

This means that China Mobile Games must meet two criteria before the next regular review of the Hang Seng Composite Index (May 17) and the Hong Kong Stock Connect (June 30) inspection, namely (1) the cumulative market capitalization coverage rate of 96%; and (2) the average month-end market value for the 12 months before the adjustment inspection date is greater than HK$4 billion in order to successfully “maintain”.

According to LiveReport data, China Mobile Gaming currently ranks around 96.15% in terms of market capitalization coverage in Hong Kong, which is just enough to meet the market capitalization coverage requirements of the Hang Seng Composite Index. In terms of market capitalization, according to Futubull Niu Niu data, the market value of Chinese mobile games is about HK$3.468 billion, which is only one step away from HK$4 billion, and it is relatively easy to reach this threshold.

2. Repurchase and increase holdings, new directors arrive, and “real money” shows confidence

Looking further, the author believes that China Mobile Games recently demonstrated the confidence of the company's management and shareholders in its value growth, whether it is the company's buyback, the increase in executive holdings, or the entry of new directors.

On the one hand, on March 28, China Mobile Games announced a share repurchase authorization, using up to HK$100 million to repurchase shares in the open market, and has begun to repurchase shares continuously. Another announcement was issued on April 23, announcing that it would purchase no more than 10% of the total number of shares issued by the Japanese company when the share repurchase authorization was approved, that is, up to 2,752,672,000 shares, or approximately HK$325 million at current prices.

It is worth noting that China Mobile Game's repurchase strategy is not a blind pursuit of large-scale capital investment, but rather a prudent decision made after comprehensively considering the two key factors of proper allocation of funds and compliance with Hong Kong Stock Exchange regulations. First, reserving sufficient capital to support game development and the launch of new projects is the key to the company's long-term growth and competitiveness. Second, follow the rules of the Hong Kong Stock Exchange to ensure that the repurchase price is not higher than 5% of the average price for the past 5 trading days.

Considering China Mobile Game's repurchase plan and market performance, it can be determined that China Mobile Gaming's repurchase campaign will continue, or help improve stock price performance.

Data source: Company announcement

Meanwhile, Xiao Jian, Chairman and CEO of China Mobile Games, has been continuously increasing its holdings since April 24. As of the close of April 26, Xiao Jian had increased his holdings by HK$1,474,900 three times. The latest number of shares held was 785 million shares, and the holding ratio increased from 28.50% to 28.51%. According to reports, during the same period last year, Xiao Jian also increased his holdings of Chinese mobile games nearly 20 times in a row, adding a total of about 14.236 million shares of Chinese mobile games.

Data source: Easy Disclosure

In short, whether it is a repurchase or an increase in holdings, it can enhance investors' confidence in the company's future development in the current context of high market volatility, effectively prevent stock prices from being too low and deviate from actual value, and protect shareholders' rights and interests.

Meanwhile, on April 22, China Mobile Games issued an announcement announcing that Guangdong Pearl River Investment Management Group Co., Ltd. (“Pearl River Investment Management”) will appoint Jiang Yukai to join the company's board of directors as a non-executive director. After it joined, the board of directors of China Mobile Games was composed of 8 members.

According to the author, Jiang Yukai joined no accident. Zhu Yihang, the actual controller of Pearl River Investment Management, as the eldest son of Zhu Mengyi's family, has continued to expand his investment landscape in the e-sports field in recent years, not only covering e-sports education and e-sports-themed industrial parks, but also diversified businesses such as MCN institutions and animation IP pan-entertainment sectors.

As early as 2021, Zhu Yihang subscribed for 56.4 million mobile game shares through its investment company Wide Fortune. The appointment of Jiang Yukai as a non-executive director can be said to be an important strategic move by Zhu Yihang to deepen its investment layout in the game and IP business through China Mobile Games. At the same time, it also provides room for imagination that it may further increase its holdings in China Mobile Games in the future.

On April 28, China Mobile Games announced that it had reached a strategic cooperation with Zhu Yihang's Super Racing Group. Among them, Super Gaming Group or its related parties intend to subscribe or purchase shares in China Mobile Games, and China Mobile Games is also interested in cooperating at the equity level with EDG e-sports clubs and MCN institutions under Chaojing Group to further strengthen the strategic cooperative relationship between the two sides.

In addition, Chaosport Group plans to cooperate comprehensively with China Mobile Games in game product research and development, game operation and promotion, game e-sports, and IP commercialization in terms of advantages such as talent resources, commercial matrices, and capital strength of its EDG e-sports clubs and MCN institutions. Achieve resource sharing, mutual benefit and win-win situation, and establish stable and sustainable strategic partnerships.

Therefore, Jiang Yukai's addition as a new director may indicate that there may be more opportunities for strategic cooperation and resource sharing between Zhu Yihang and China Mobile Games in the future. And Zhu Yihang's extensive investment in e-sports and pan-entertainment will help China Mobile Games expand its business and integrate resources in these fields.

For example, the announcement mentioned using the MCN organization and media resources of Super Sports Group to promote China Mobile Games games and establish exclusive KOL and KOC social media matrices to improve the conversion efficiency of the company's game announcements; the two parties will launch an international physical battle card business based on the “Legend of Sword and Fairy” IP to promote local Chinese IP to the global market; China Mobile Games will jointly build an e-sports ecosystem with EDG e-sports club to develop global game products with e-sports attributes; through the establishment of a new game experience research institute, more outstanding e-sports players and anchors will participate below to provide professional feedback and suggestions for games currently being developed by Chinese mobile games. The emergence of these substantive collaborations has also directly hit the “bullseye” of rapidly improving the core competitiveness of the two sides.

At the same time, the development of “Legend of Sword and Fairy” IP derivatives and offline commercial cooperation with Hesheng Commercial Group, a subsidiary of the family, may spark “sparks” in the future and generate new business models and growth points.

The positive feedback from the capital market also shows the market's confidence in the future value growth of Chinese mobile games. After the announcement that Jiang Yukai joined China Mobile Games as a new director, the company's stock price continued to rise for two consecutive trading days, with a cumulative increase of 20%.

3. “Fairy Sword World” is scheduled to be launched, and rich reserves lay the foundation for growth

Of course, as an investor, judging the long-term value of mobile games will ultimately have to return to fundamental analysis.

Heavy new games launched intensively during the year and abundant new game reserves will not only inject strong impetus into the performance growth of mobile games in China, but also lay a solid foundation for its continued growth with diversified revenue sources.

According to reports, the Chinese mobile game's blockbuster product “Fairy Sword World” based on Fairy Sword IP has announced the three-test “Wind Start” test schedule for May 31. As the first multi-terminal test Guofeng Xianxia open world game in China, “Fairy Sword World” has already attracted the attention of countless players. This test is the first paid file deletion test for the game, and supports three-terminal interoperability between PC, Android, and iOS. It is expected to bring considerable revenue to mobile games.

Source: Company Information

In this three tests, the mobile game once again carried out all-round optimizations and upgrades around content, visual effects, game mechanics, gameplay, and characters.

For example, the game will fully present “Jiangnan”, the first major area in “Fairy Sword World”; visually, the game will integrate the classic “Three Emperors and Five Spirits” worldview from Fairy Sword IP to bring players a more immersive experience; in terms of game mechanics, the new “Imperial Spirit” system will provide multiple ways to interact and explore; in terms of characters, the game will add new playable original characters “Easy Shu” and “Yun Ruicao” to further enrich the game's character lineup and story line.

In addition, China Mobile Games also expects to launch major IP games in 2024, such as “Doulo Continent: Reversal of Time and Space”, “Battle for the Sky: Summit Showdown”, “Naruto: Master Konoha”, “The Legend of Cao Cao Cao: New Three Kingdoms”, and “The Daily Life of a Chat Group”. Many of these games have already been tested and pre-orders are open. Combined with the launch of “Fairy Sword World” during the year, it is expected to contribute well to the growth of mobile games in China this year.

In response, major brokerage agencies have also given positive expectations for the future growth of China Mobile Games. For example, CMB International maintains the “buy” rating of China Mobile Games, with a target price of HK$2.9 million, and predicts that its revenue for the 2024 fiscal year may increase by 32%, and the adjusted net profit will reach 387 million yuan.

4. Conclusion

Overall, in the current market environment, China Mobile Games has shown a positive trend and strong growth potential, both in terms of fundamentals and capital. On the one hand, the launch of major new games such as “Fairy Sword World” will further boost the company's performance growth. On the other hand, the buyback increased holdings and the addition of new directors provided investors with confidence and support.

Meanwhile, the Hong Kong stock market has also picked up significantly recently. April 26 was also the first time since August last year that it attacked the position of the Bull and Bear line in the intraday market. It is expected that the bulls and bears will continue to rise in the future, and the capital side will also usher in a major return in the near future. Tencent, the leading label in Hong Kong stocks, was also the first to break through the annual line last week, with a weekly increase of 14.68%.

Based on various positive factors, the author believes that China Mobile Games should have received premiums brought about by stronger performance, as well as valuation repairs brought about by subsequent market liquidity restoration, and I am quite optimistic about the next “battle for maintenance.”