Uni-Star Files For Hong Kong IPO Despite Declining Fortunes

The gaming company has applied to list in Hong Kong despite reporting plunging revenue in the first nine months of last year

Key Takeaways:

• Uni-Star has applied to list in Hong Kong, reporting it fell into the red last year as its revenue plummeted
• Paid subscribers for the role playing game specialist's two hit games plunged last year as they entered the twilight of their lifecycles

Growing opportunities for highly personalized entertainment over increasingly sophisticated smartphones is creating new opportunities for mobile games to claim a piece of a pie long dominated by traditional PC games. Now, investors could have a chance to buy into the role playing game (RPG) segment of that mobile market with a planned IPO by specialist developer Uni-Star Interactive Holding Ltd.

Despite its niche in the RPG realm, however, Uni-Star could be a hard sell due to its declining fortunes lately as its two most popular titles head into the twilight of their lifecycles.

According to its listing document filed late last month, Uni-Star recorded 5.5 billion yuan ($750 million) in gross billings from its RPGs in 2023, making it China's third-largest RPG mobile game provider with 6% of the market. Its "Nine Realms: Sword & Immortals" and "Sword Fantasy" are its two biggest breadwinners with the highest gross billings.

Founded by Guo Zhongjian in 2014, Uni-Star is now run by his daughter, Guo Xiaolan, the company's chairman and CEO. It's China's sixth large mobile game company in terms of gross billings, which refers to the total amount of money gamers pay for in-game purchases in a given period of time.

The broader gaming industry consists of upstream players like intellectual property (IP) holders and actual game developers; midstream operators such as game publishers and distributors; and finally actually gamers at the bottom of the chain.

IP holders typically license their property to game developers, who design and develop games. Publishers launch, promote and market games, and distribution channels provide platforms for game downloads and upgrades, such as app stores operated by Apple and Google. Uni-Star covers both the upstream and midstream parts of the chain, engaged in game development, publishing and operation.

Steady growth for RPGs

Mobile games are divided into four categories, including RPGs, simulation and strategy games (SLG), card games and multiplayer online battle arena (MOBA). Among those, RPGs control the largest piece of China's gaming market. Such games generated an estimated 92.3 billion yuan in revenue in 2023, accounting for 30.5% of an overall market worth 302.3 billion yuan that year, according to third-party data in the listing document. The RPG market is expected to grow 16.2% annually to reach 116.6 billion yuan by 2028.

In RPGs, players take on the roles of various characters in the games and interact in fantasy or fictional worlds that are constantly changing, taking responsibility for the actions of their characters. Such games usually have a longer life cycle than casual games, allowing developers to squeeze more money out of them.

Mini mobile games have become increasingly popular in recent years, favored by gamers with busy lifestyles who may not have the long periods of time needed to play more traditional games and often play in a more fragmented manner. Developers of such games often use HTML5 and similar technologies to embed their products as mini-apps into platforms like WeChat, Douyin and Alipay, allowing gamers to play quickly without having to do a download.

As mini-games gain popularity, China's market for such titles has boomed. The market grew by a blistering 74.9% annually from 2018 to 2023 to reach 31.1 billion yuan in 2023 and is set to grow further still to 126.1 billion by 2028, according to the listing document. Uni-Star jumped on the boom to become the industry leader, with as much as 16.4% of China's mini-game market in 2023, putting it in a sweet spot for one of the sector's fastest-growing segments.

Sliding performance

Despite that enviable status, however, Uni-Star has faced difficulties lately keeping up with rivals in such a fast-changing segment. Its revenue plunged by 50.8% year-on-year to 2.1 billion yuan in the first nine months of last year. As that happened, the company swung into the red with a loss of 47.17 million yuan for the period.

The rapid change of fortune owes to fading popularity of "Nine Realms: Sword & Immortals" and "Sword Fantasy." The former had 6.71 million monthly active users (MAUs) in the first nine months of last year, down 78.6% year-on-year; while the latter had 3.74 million MAUS, down by an even larger 81.4%. Average monthly paying users shrunk by 67% and 52.9% for the two titles to just 93,000 and 264,000, respectively, significantly dampening Uni-Star's revenue last year.

All games have similar lifecycles, which are generally divided into three phases: growth, maturity and decline. Games typically build up their user bases in the growth stage as they gain market coverage. They typically continue to generate strong gross billings in their maturity phases, before the numbers start to drop off significantly in the final phase as gamers gradually lose interest and move on to something new.

Lifecycles for RPGs in China generally range from as little as 10 months to as much as two years, while hit games can last as long as four to six years. "Nine Realms: Sword & Immortals" falls into the longer-lived category, having been in operation for about 62 months, while "Sword Fantasy" has also been around for a relatively long 50 months. While those long lives speak to Uni-Star's ability to develop enduring titles, its two biggest hits are now clearly in their sunset periods.

Uni-Star is trying to fill the vacuum with its launch of two new games, "Sword Path of the Mountain and Sea," which launched in June 2023, and "Mysterious World: Spirit King" which debuted two months later. But both games' average monthly paying users are still nothing compared to the previous hits, resulting in the big drop in overall revenue, which is likely to drop Uni-Star into the red for the full year.

High valuation might be a stretch

Data from the first three quarters of 2024 indicate Uni-Star's revenue might contract by about 50% for the full year, which would give it annual revenue of about 2.66 billion yuan. Based on data from Bloomberg, that amount is similar to rival CMGE (0302.HK), which has a current market cap of 1.74 billion yuan and relatively low forward price-to-earnings (P/E) ratio of 4.7 times.

But since Uni-Star is likely to record a loss this year, a better reference is CMGE's price-to-sale (P/S) ratio, which has ranged between 0.6 times to 1 time over the last six months, as its market value has varied between 1.6 billion yuan and 2.6 billion yuan during that time. Uni-Star certainly doesn't look too attractive on the whole, with no popular games in operation and its hit games in decline. Those negative factors, combined with fierce competition in the industry, could make it difficult for the company to achieve a valuation on the scale of CMGE.