A long wait to tap the capital markets; high uncertainty over if game titles will be able to approve for commercial launch; a competitive landscape dominated by behemoth companies. These factors are pushing China’s small and mid-sized gaming companies to go offshore to seek capital, and they are setting their sights on South Korea thanks to its lower listing threshold and vibrant gaming industry, market observers say.

At least two more Chinese game publishers are set to float their shares on the Kosdaq, industry watchers told 36Kr, and this comes in the wake of the much-hyped debut of SNK in May.

Well known for its combat game The King of Fighters, SNK went public on the Kosdaq on May 7, successfully raising USD 140 million.

SNK’s roots trace back to Japan as early as 1978. The company eventually became Chinese-owned after a series of mergers and acquisitions. Its parent is Ledo Interactive, which was founded by Ge Zhihui, a former executive of China’s third-largest gaming company Perfect World. Established in 2014, Ledo quickly soared to become a unicorn in two years, carrying a valuation of over USD 1 billion.

On its debut on the Kosdaq, SNK reported a market capitalization of almost USD 700 million, a record high among foreign companies listed on the bourse—a feat that Ge boasted about to the media that day.

Another Chinese game publisher Me2zen Games is also planning to float shares in South Korea, though the company hasn’t disclosed its planned time frame, a company source told 36Kr. The company is currently in talks to raise pre-initial public offering (IPO) funds.

Me2zen is a social casino and card games developer targeting North America, Europe, and Asia. Headquartered in Hong Kong, it has a research and development team in Beijing and boasts over 1.3 billion users worldwide, according to its company website.

Industry watchers said the South Korean capital market has its allure for Chinese companies.

“The procedure to list in South Korea is much simpler and the bar is lower compared to China,” said an investor of SNK who requested not to be named. The South Korean bourse is buoyant with strong participation from retail investors, and listed companies can tap additional funding more easily, the person added.

The Kosdaq adopts a registration-based IPO system, while mainland China implements an approval-based mechanism for its main stock boards. The latter sets a high bar for applicants’ earnings, closing the door to many small and medium enterprises that have yet to make a profit.

According to data compiled by 36Kr, more than 470 companies are still in line for their IPOs in China. Some filed their applications as early as 2016.

Game titles freeze

China was the world’s largest gaming market by revenue from 2015 to 2018. It had some 620 million players last year, nearly doubling the size of the US population. For years, the sector’s rapid expansion created a highly competitive market, where companies raced to release games and spent recklessly to seize market share, leading to a glut of games and game companies.

But things took an unexpected turn in March last year. Chinese authorities paused its commercialization licensing process for new video games, as it aimed to stem growing myopia among youth and censor video game contents deemed too violent or sexual.

By the time the freeze was thawed nine months later, thousands of games were reportedly awaiting approval for commercialization, impacting the revenue streams of many video game studios. Unsurprisingly, China’s gaming market took a hit—its revenue grew by a mere 5.3% in 2018—the slowest over the past decade, according to a report by Beijing-based research company Gamma Data and the Game Publishers Association Publications Committee, China’s official gaming association.

Many smaller companies reportedly went bust as they had no revenue from new game releases to sustain business operations. China’s top two gaming giants, Tencent and NetEase, bore the brunt as well. Tencent said in its financial report that growth in its gaming revenue slowed to 9% in 2018, a steep drop from the previous year’s 51%.

Looking elsewhere

With a gloomy backdrop at home, analysts said it’s no surprise that Chinese video game companies want to tap capital markets in South Korea.

According to industry tracker Newzoo, South Korea is expected to be the world’s fourth-largest gaming market this year, following the US, China, and Japan. Nexon, Netmarble, and NC Soft are the top three game publishers in the country.

Eying the potential, Tencent invested USD 500 million in Netmarble in 2014, becoming the third-largest investor with a 17.7% stake. Netmarble listed on the Kosdaq three years later, raising USD 2.3 billion.

Tencent this year also made a bid to acquire Nexon, the developer of Dungeon and Warriors. However, the Chinese tech giant pulled out in May as the price was too high, 36Kr reported, citing a South Korean internet entrepreneur.

In 2010, another South Korean game publisher, Eyedentity Entertainment, was acquired by Chinese rival Shanda, which is backed by Tencent and rebranded itself as Shengqu Games in March after an ownership shakeup.

Tencent also owns significant stakes in US game developers Riot Games, Epic Games, and Activision Blizzard, according to Reuters. In 2016, Tencent acquired the majority of Finland-based Clash of Clans mobile game maker Supercell for USD 8.6 billion.

Plenty of hurdles, however, lie ahead for Chinese companies’ quest to conquer the world—or at least the global cyber gaming scene.

While listing on the Kosdaq is relatively easier, companies will be subject to stricter scrutiny over their financial well-being. As of April, at least 11 Chinese firms had been delisted from the South Korean bourse due to report auditing issues, South Korean news outlet Pulse News reported.

The market cap of SNK, on the other hand, shrank to USD 315 million on Sept. 11, less than half of the USD 698 million it registered on the first day of debut.

After all, tapping overseas markets isn’t a bed of roses. Chinese game companies must also look out for cultural differences and different user preferences. “Chinese gaming companies must have the know-how to cater to the local market, which will help improve their creativity and techniques to produce games with high quality and be well-received,” said a market analyst, who preferred not to be named.

The original article was written by Wang Ying and Wu Mengqi of 36Kr, KrASIA’s parent company.

Li Weilin and Low De Wei contributed to this report.

Contact the writer at sunhenan@kr-asia.com

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