Mobile Game Maker Chukong Joins IPO Queue
Signs of weakening sentiment haven’t stopped the flood of Chinese tech firms lining up for new listings in New York, and now we can add mobile game maker Chukong Technologies to the list of new IPO candidates. If anything, recent signs of weakening sentiment may make companies that have already done much of the preparatory work for IPOs accelerate their plans, meaning we could see quite a few new listing applications in May. That’s what Chukong is planning, according to media reports saying the firm has made its first non-public filing for an IPO with the US securities regulator. (Chinese article)
There’s not much more detail in the reports, except to say that Chukong could make its first public filing as soon as next week. Chukong’s listing plan was first disclosed in February, when media reported the 4-year-old company was aiming to raise up to $150 million, and had hired Morgan Stanley and Deutsche Bank to underwrite the deal.
To better understand the offering’s chances for success, we need to look at Chukong’s position in the online gaming space, and also at the broader IPO market. Chukong is positioned as a mobile game company, and would become the third such name to list in New York over the last 2 years. The first company to list was China Mobile Games (Nasdaq: CMGE) in 2012, followed by Sungy Mobile (Nasdaq: GOMO) at the end of last year.
After its offering via an unusual introduction method, China Mobile Games shares initially tumbled but then surged last year amid a broader rally for China Internet stocks. But they have dropped sharply this year, and now trade at less than half of their 2013 highs. Sungy Mobile’s shares also initially surged after their offering amid a broader wave of positive sentiment for Chinese tech shares, and at one point nearly tripled from their IPO price. But since then they too have given back a lot of the gains, though they still trade at a healthy 70 percent above their offering price.
The mobile gaming companies’ performance contrasts sharply with traditional online gaming firms like Shanda Games (Nasdaq: GAME), Giant Interactive (NYSE: GA) and Changyou (Nasdaq: CYOU), which have seen their growth drop sharply as gamers abandon their desktop PCs in favor of playing on their smartphones. Both Shanda and Giant have announced plans to go private in the last few months, and I wouldn’t be surprised to see 1 or 2 more companies make similar bids.
From a broader perspective, sentiment towards Chinese IPOs seems to be worsening by the day, following a huge wave of positive momentum in the second half of last year. Two of the newest listing candidates, Sina’s (Nasdaq: SINA) Weibo microblogging unit and online cosmetics seller Jumei, both had to cut the size of their sizable offerings in the last week, after meeting with weakening sentiment. (previous post) Sina itself and leading online travel agent Ctrip (Nasdaq: CTRP) have also launched major share buybacks in the last 2 weeks in bids to support their sagging stocks.
So what does all this mean for Chukong’s upcoming offering? We’ll have to see some financial data to make a more precise assessment, but I suspect the company is profitable and probably growing at a healthy rate. Still, the worsening IPO sentiment means it may ultimately have to scrap its offering, especially if Weibo and Jumei shares decline on their trading debut. Over the medium term the stock does look like a solid play, as mobile gaming is clearly set for growth. But over the longer term, I do expect these mobile gaming companies will follow a similar path to the traditional desktop gamers, as they get overtaken by the next hot trend after mobile gaming.
Bottom line: Chukong Technologies looks like a good medium-term bet due to its position in the high-growth mobile games space, but it may have to pull its IPO if sentiment continues to weaken.
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