CMGE Turns Its Game To e-Sports With New Tie-Up

Key Takeaways:

• CMGE said it has formed a partnership with Guangzhou Chaojing Investment aimed at tapping the latter’s strong position in e-sports
• CMGE’s shares rose 3.2% on the news and have rallied 30% in the past week on renewed investors interest in the gaming sector after a prolonged crackdown that is now easing

By Doug Young

CMGE Technology Group Ltd. CMGEF is placing a big bet on e-sports, hoping a related new tie-up can bring some “game” back to its sagging stock.

Investors seemed to like the idea, with CMGE shares jumping 3.2% on Monday after the company, one of China’s many mid-sized game operators, announced its new tie-up with e-sports specialist Guangzhou Chaojing Investment Co. Ltd. The gain extended a rally that has seen CMGE’s stock jump 30% over the last week, riding a sudden broader rally that saw the Hang Seng China Enterprises Index rise nearly 10% last week.

CMGE’s story appears to be one of growing enthusiasm returning to China’s battered gaming stocks after the group took a major beating over the last few years – part of a series of government crackdowns across China’s internet sector.

Among other things, the group was subject to a series of suspensions, often lasting months and even more than a year, in regulatory approval of new games by China’s regulator. It was also subject to new rules severely limiting the amount of time minors could spend gaming online, and also the money they could use to tip their favorite internet personalities.

But more recently, Beijing seems to be easing up the gaming sector. Part of that probably owes to its importance as an economic engine as China’s economy slows. Another element is China’s recent realization that its industries are becoming increasingly isolated from the rest of the world, which is leading to renewed efforts to keep its cutting-edge sectors like gaming engaged in the global community.

Such factors are probably a factor leading companies like CMGE to start seeking new alliances, believing such tie-ups will be welcomed by Beijing as a way to boost the industry. Earlier this month we saw a similar major new tie-up when domestic giant NetEase NTES resumed a partnership with U.S. peer Blizzard after a one-year pause to bring titles like “World of Warcraft” and “Diablo” to China.

CMGE’s tie-up isn’t quite such a headline-grabber, but looks relatively significant nonetheless. The deal will see the pair cooperate in game development, operation and promotion, according to the Sunday announcement. The deal looks especially focused on e-sports, noting that Chaojing’s deep resources in e-sports include its operation of related channels on popular local social media platforms like Douyin, Bilibili, Huya, Kuaishou and Xiaohongshu.

“The group can make use of Chaojing Group’s resources and experience in e-sports, media communication, fans management and other businesses to further improve the group’s efficiency in respect of game research and development … and enhance the group’s business competitiveness,” CMGE said in the statement.

No financial terms were given, which indicates this is probably a cross-marketing agreement rather than a tie-up involving major investment by either party. But if the partnership proves fruitful, it’s quite possible we could see the two sides extend the tie-up with the formation of a joint venture or cross investment in each other.

E-Sports potential

The tie-up takes direct aim at China’s e-sports market, which is both full of potential but also sensitive due to its vulnerability to future crackdowns. In addition to spending extended time online competing and following their favorite gamers, e-sports enthusiasts also often tip those gamers as part of the culture – two areas that could come under more regulatory scrutiny in the future.

China’s e-sports industry was worth 127 billion yuan ($17.5 billion) in 2021, roughly double the 60 billion yuan four years earlier in 2017, according to third-party data in a U.S. IPO prospectus submitted by smaller e-sports company NeoTV Group last year.

In addition to small companies like NeoTV, the industry has spawned larger players like Tencent-backed VSPO, which last year raised $265 million from Savvy Games Group, the gaming arm of Saudi Arabia’s sovereign wealth fund.

CMGE’s new tie-up also contains an international angle, noting the alliance is aimed at capturing a slice of the $10 billion global market for physical battle cards using Chaojing’s international channels related to one of its games.

Like many Chinese gaming companies, CMGE has been trying to diversify its business into other markets, partly as a hedge against regulatory risk at home. Its efforts on that front backslid a bit last year, with international revenue dropping 37% to 227 million yuan in 2023 from 361 million yuan in 2022. That dropped the international portion of its revenue to 9% of the total last year from 13% in 2022, so perhaps the new tie-up can help to reverse that trend.

Like many in the sector, CMGE has struggled in recent years due to the regulator tightening. Its revenue declined 4% last year to 2.6 billion yuan from 2.7 billion yuan in 2022, though its loss over that period narrowed to 38 million yuan from a 217 million yuan loss in 2022. And importantly, the company returned to profitability on an adjusted basis last year, which typically excludes employee-based stock compensation. It reported a modest 5.4 million yuan adjusted profit for 2023, reversing a 196 million yuan loss on that basis in 2022.

Analysts are quite bullish on the company as all the recent regulatory noise fades into the background. Four polled by Yahoo Finance expect CMGE’s revenue to jump 44% this year, and then to rise another 18% in 2025.

The analyst bullishness and recent rally in its stock have left CMGE’s shares valued relatively strongly compared to other mid-sized gaming companies, though they’re still well behind big names like NetEase. The stock now trades at a price-to-sales (P/S) ratio of 1.25, behind NetEase’s 4.4 but ahead of the 1 for Huya HUYA and 0.7 for NetDragon (0777.HK).

At the end of the day, CMGE’s new tie-up and China’s loosening regulatory environment both look broadly positive for the company. And if the nascent rally for Chinese stocks continues, it’s quite possible companies like CMGE could emerge as major beneficiaries.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.