FAST NEWS: CMGE Makes Strong Overseas Gains, But Rising Costs Hit Profits

The latest: Game operator CMGE Technology Group Ltd. (0302.HK) reported last Thursday its revenue last year rose 3.6% to 4 billion yuan ($628 million). But its profit fell 13.9% to 594 million yuan, while its adjusted profit fell by an even larger 21.9% to 630 million yuan.

Looking Up: Revenue from the company’s international operations grew strongly to 458 million yuan last year from just 6 million yuan in 2020, as it diversifies beyond its home China market. After the rapid rise, revenue from outside China accounted for 11.6% of the company’s total last year.

Take Note: The company’s 3.6% revenue growth last year was far slower than the broader industry’s 6.4% growth, according to data in the company’s report. Based on the latest figures, the company controlled about 1.3% of China’s gaming market last year.

Digging Deeper: Despite its relatively large size, with a market value of about $850 million, CMGE has failed impress investors since its IPO in 2019. The company’s rising costs were the primary factor behind its falling profit last year, with marketing, distribution and administrative expenses combined rising 27% – far outpacing revenue growth. In addition to its stiff competition, China’s gaming sector is facing the growing challenge of tighter oversight by regulators looking to curb compulsive gaming by minors. The industry is also subject to periodic freezes in regulatory approvals required for all new game titles, limiting companies’ abilities to launch new games. The latest such freeze began last July, with no signs of when new approvals might resume.

Market Reaction: CGME shares rose 5.2% in the two trading days after the results were announced. They have lost about a half of their value since a peak last July when the ban began, and now trade near the lower end of their 52-week range.

Reporting by Doug Young

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