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Shares of Chinese gaming firm plunge 62 billion yuan

Teenagers try mobile games at the China Digital Entertainment Expo. File photo: AFP.

(ATF) Chinese gaming firm 37 Interactive Entertainment has long been seen as the top rival to Tencent in the internet gaming sector, and is still a leader of A-share listed firms. But its share price has dropped dramatically over the past nine months – losing 62 billion yuan (nearly $9.5 billion) from mid-July 2020 to April 8, 2021.

The company – listed as Wuhu Sanqi Interactive Entertainment Network Technology Group – has suffered a number of blows. The latest came on Tuesday April 6, when the Ministry of Industry and Information Technology issued a notice to say its game “Slaying the Dragon Breaking Dawn” had infringed on users’ rights and interests. The game has been promoted by celebrity host Wang Baoqiang.

Other games of the firm have been endorsed by movie stars Jackie Chan and Jet Li.

Besides the government slap, other factors have played into the dramatic loss of value. On March 12, Sanqi Mutual Entertainment issued two financial forecasts, one optimistic and the other pessimistic.

In Sanqi Interactive’s 2020 performance report, total operating income was 14.4 billion yuan, a year-on-year increase of 8.87%; net profit attributable to shareholders of listed companies was 2.78 billion yuan, a year-on-year increase of 31.28%. So, the company’s main business has developed well and its operating performance has maintained sustained growth.

But, Sanqi Mutual Entertainment also released a disappointing forecast for the first quarter of 2021, saying it expected to achieve a net profit of 80 million to 120 million yuan, a decrease of 83%-89% compared to the same period last year.

Sanqi Interactive said the decline in net profit was due to fluctuations caused by phased investment in business development. Investment in the first quarter is expected to be gradually recovered in the second to fourth quarters, and it will actively promote steady development of the company’s business throughout the year.

However, on the second day after the performance forecast was released, Sanqi Mutual Entertainment’s stock market troubles began.

The firm launched two new games domestically in February 2021 that were received well, and the strategy game “Puzzles & Survival” was released globally with overseas market revenue expected to increase by 120% to 150% year-on-year. So the overall monthly income from abroad is expected to exceed 500 million yuan.

But the firm’s plans look shaky because of high marketing costs and the fact it is releasing games under the Apple ecosystem. Its App Store is the only distribution channel and takes a revenue share of 30%, while major app stores of Android Intermodal take about 50%.

Later, as the release hype gradually faded, the growth of intermodal channel market traffic was weak.

In the three years from 2017 to 2019, Sanqi Mutual Entertainment’s revenue was 6.189 billion yuan, 7.633 billion yuan and 13.227 billion yuan, an increase of 18%, 23% and 73% year-on-year, while its sales expenses were 1.9 billion yuan, 3.347 billion yuan and 7.737 billion yuan, an increase of 19%, 74% and 133% year-on-year, accounting for 31%, 43% and 58% of revenue respectively. To increase activity, the firm bought outside developers’ games, rather than developing its own games, while focusing on volume.

The sharp drop in profits in the first quarter exposed the shortcomings of 37 Interactive Entertainment’s focus on game buying. Purchase volume has given it a big name, but it also got tied to the shackles of its development.

Whole sector has slumped

An analysis by Tou Leopard Research Institute noted that the strategy of Sanqi Mutual Entertainment for mobile games is similar to that of the web era, with classic IP operation, purchase volume, and server operation as the main facets. The strong turnover and high efficiency model guarantees a high turnover, but business operating costs are too high. Faced with rising purchase costs, business sustainability is poor.

In fact, this is a problem not only for Sanqi Mutual Entertainment, but a collective dilemma for A-share game companies that lack innovation, according to the paper.cn.

In 2020, the epidemic spurred a spike in demand for online entertainment, and the game industry saw a wave of high growth opportunities. The A-share game sector rose as a whole, but after reaching a high in July, almost all of these promising firms fell collectively.

According to market statistics, compared with the high share price of the past year, Kaiying Network has fallen 39%, Century Huatong is down 52%, Perfect World has also plunged 52%, while Sanqi Interactive has slumped by 55%.

Gao Dongxu, founder and chief analyst of the China Entertainment Think Tank, said the stock prices of the above-mentioned companies are restricted by the expected product revenue, which is not at an ideal state. Most companies lack new explosive products and rely more on old products to support them, while some unlisted game companies have been more innovative and taken market share.

Other curious factors emerged during the debate over games, amid questions on whether young people who like to play games also drink alcohol.

According to a British Health Survey, 29% of young people aged from 16 to 24 in the UK do not drink alcohol, compared with 18% ten years ago. However, in China, young people prefer milk tea and coffee, and have little interest in liquor products. They want games.

And while the performance of liquor stocks is good, as proven by Moutai, China’s top A share, drinking is a habit of older generations and the youth prefer bubble tea.

High-quality games needed

For the game market, the changes in user habits in these changing times are more obvious. With the continuous launch of high-quality games and the broadening of players’ horizons, mobile games similar to online games are no longer sought after by young people. To produce good products, game manufacturers must truly invest in R&D and innovation.

In the first three quarters of 2020, Sanqi Mutual Entertainment’s R&D investment totaled 856 million yuan, and the number of game and system R&D personnel exceeded 2,000. It seems like a lot of people and a lot of money, but these resources have to be dispersed among many projects, and the end result was lacklustre.

According to a report by Tou Leopard Research Institute in September 2020, Sanqi Mutual Entertainment had 190 highly active mobile games and 227 highly active web games. And on its official website, the game platform has more than 600 products, while its the mobile game platform has nearly 2,000 products, and its international distribution platform has nearly 250 products.

In contrast, behind the success of the popular game “Original God” in 2020, there was a 300-person R&D team that had researched and developed the game for nearly three years, while investing more than US$100 million in deep cultivation of the game environment. The return on that, without relying on Huawei and Xiaomi app stores, the number of reservations for “Yuan Shen” omni-channel exceeded 17 million, and the game’s first monthly turnover exceeded 3.5 billion yuan.

For web game tigers, “the times have changed”, this is the source of the collective dilemma of A-share game makers.

If Sanqi Mutual Entertainment wants to get back in the game, it needs not only change, but make rapid and fundamental change.


Careful with those mobile games, comrade

The game is on

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.


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