Game operator ZX sees creative future in AI

The owner of the Tan Wan platform has invested HK$100 million to set up a subsidiary to apply artificial intelligence to the gaming industry  

Key Takeaways:

  • ZX revenue fell 26% to 6.51 billion yuan last year 
  • The share price has been on a roller coaster ride since the company’s Hong Kong IPO last year 

By Lee Shih Ta

A Chinese gaming company that branched out into instant noodles and collectable toys is generating another business offshoot in the field of artificial intelligence.

Like many industries, the gaming sector has been eager to try out AI as a business tool. The AI penetration rate among Chinese gaming companies has reached 99%, according to industry data, with the technology used to develop new content and user experiences for the world’s biggest online gaming market.

ZX Inc. (9890.HK), an online game publisher that runs the “Tan Wan” platform, is leaning into the trend, looking to harness AI for its own benefit and for its industry partners. The company announced last week it would invest HK$100 million ($12.81 million) to set up a wholly owned subsidiary in Hong Kong to develop AI applications for the gaming industry.

The unit, Hong Kong Yuanda Future, will focus on utilizing AI for game production and promotion, ZX said in its statement, listing uses in areas such as artwork, copywriting and video development, with the goal of generating new game play and improved user experiences.

Yuanda Future may go on to acquire or invest in games and overseas online ventures that offer a good fit for its business, ZX said.

While AI gets a mention in most company reports these days, the gaming sector was an early adopter even before the arrival of ChatGPT a couple of years ago. ZX’s ambitions were telegraphed in its 2023 annual report, where the game publisher outlined plans to launch an AI-driven intelligent platform to optimize marketing and advertising, as well as track industry trends and player satisfaction. 

ZX is essentially a game distribution company rather than a product developer. It gets most of its revenue from marketing and supplying games whether via its self-operated business or through links with app stores and other channels. The self-owned gaming operations enjoyed a gross margin of 92.3% in 2023, while thecollaborative business managed 24.5%, according to data in the company report.

The company brought in revenues of 6.51 billion yuan last year, a 26% year-on-year drop, hurt by falling billings from its top games and fierce competition in the gaming market. Net profit suffered a bigger fall, dropping 54% to 240 million yuan. Overall gross margin slipped slightly from 70.7% to 70.2%, and revenue from online game publishing and marketing accounted for 96% of total turnover.

ZX launched 69 new titles last year, bringing its total marketed game products to more than 350, with an accumulated registered user base of 490 million. However, the monthly active user (MAU) rate for gaming products fell to 8.75 million last year, from around 10 million the year before, and the number of monthly paying users also dropped nearly 38% to 1.1 million, although the average monthly revenue per paying user rose around 16% to 469.2 yuan.

“Zha Zha Hui” noodles 

ZX is more focused on marketing games than generating them. The company spent 3.88 billion yuan, or 59% of its overall revenues, on sales and distribution last year, compared to around 63% in 2022. By contrast, R&D costs were only around 171 million in 2023, rising 8.6% from the 2022 level due largely to share-based compensation after the firm’s Hong Kong IPO last year.

The company’s strategy has been to pump out a large volume of games, with a rapid turnover and using celebrity endorsements to drive traffic. A line from a 2017 game, voiced by Hong Kong actor Zhang Jiahui, became an enduring internet meme, drawing attention for his pronunciation of “Hello, I am Zha Zha Hui” in Mandarin while the game itself is now largely forgotten.

The buzz surrounding “Zha Zha Hui” led ZX to launch a range of rice noodles under that name in 2020 as part of a diversification strategy around its pop culture branding.

From distributor to developer?

Quality rather than quantity is usually the key to staying competitive in China’s gaming market. In setting up its AI offshoot, ZX could be making a first step towards creating its own games. Investors initially welcomed the news as a potential positive after the blow of earnings disappointments. ZX’s stock rose more than 6% after the AI subsidiary was announced, but fell the next day and retreated close to record lows again.

ZX shares have been on a roller coaster since the company’s Hong Kong IPO last September. At the start, investors flocked to the listing, which was more than 100 times oversubscribed. From an initial price of HK$14 the share rocketed to a high of HK$71 at the end of January. But the price suddenly plunged 76% on February 2, with unusually high turnover. Some analysts speculated that market makers were dumping the stock to take advantage of an inflated price peak.

As the gaming industry came under pressure in recent years, ZX turned to the potentially resilient food and consumables sectors, launching its Zha Zha Hui noodles and a range of boxed toy figures with bobbly heads like broccolis.

ZX’s share price is still down more than 30% year to date, leaving it with a price-to-earnings (P/E) ratio of 32.3 times. That level is close to the 32.5 times for Tencent Holdings (0700.HK) and higher than the 12.4 times for NetEase (9999.HK) and 9.9 times for CHT Holdings (2602.SZ).While shaping customer tastes with catchy marketing can be an asset, growth usually comes from a company’s core products and services. Investors are unlikely to expect a HK$100 million investment in AI to deliver a quick business reboot. 

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