ZX sags in trading debut

Despite an IPO that was heavily oversubscribed, the game operator’s shares lost more than a quarter of their value over their first three trading days

Key Takeaways:

  • Shares of ZX fell 27% in the first three days after their trading debut, but pared some of those losses in their fourth day on Wednesday
  • The gaming operator’s revenue fell 25% in the first six months of the year, as its average paying users and paying user retention rate both fell year-over-year


By Edith Terry

Wu Xubo first started angling for an IPO for his gaming company, ZX Inc. (9890.HK), as early as December 2016. At that time he had just moved the company, then called Tanwan, from China’s commercial capital of Shanghai to the far less affluent city of Shangrao in East China’s Jiangxi province. He made the move to try and take advantage of a government policy that let companies from poorer regions skip to the head of the queue for IPO approvals.

Fast forward seven years, when Wu’s operating company is still in Shangrao. But an IPO on China’s domestic A-share market never happened. Instead, ZX finally made its trading debut in Hong Kong last week after first filing for the listing last November.

Unfortunately for Wu and ZX, much has changed in China’s gaming landscape since he first considered an IPO – most of it not for the better.

China became the world’s largest gaming market in 2015, powered by hundreds of millions of young gamers that helped to spawn giants like Tencent (0700.HK) and NetEase (NTES.US; 9999.HK) that are some of the world’s most valuable companies. But that boom has been followed more recently by a steady series of policy crackdowns, including an eight-month freeze on new video game licenses in 2021.

Since then the government has implemented additional freezes, and also rolled out other restrictive policies limiting how much time minors can spend gaming. The wave of regulation has relaxed this year, allowing companies like Tencent and NetEase to record second-quarter revenue gains of 11% and 3.7%, respectively. As their situation improved, shares of both companies have increased over the past year.

Perhaps ZX thought it could seize on that positive sentiment, and also ride a wave that propelled six companies to Hong Kong IPOs in the last week of September, including Tencent-backed Tuhu Car Inc. (9690.HK) and AI giant Beijing Fourth Paradigm (6682.HK).

Things were certainly looking good for ZX initially, with its share sale oversubscribed by 103 times – the most of any Hong Kong listing so far this year. The company sold nearly 19 million shares for HK$14 apiece, representing the top of their range.

But that’s where the good times ended, as ZX’s stock fell 27% in its first three trading days, before recovering some ground on Wednesday. Still, the stock is down about 12% from the IPO price as of the Wednesday close in Hong Kong.

Investors may have been at least partly spooked by ZX’s release of its first earnings report for the first six months of this year the same day as its trading debut. Unlike its giant peers that posted revenue gains, ZX followed a trend that saw revenue from the broader gaming industry fall by 2.4% in the first six months of 2023 to 144.3 billion yuan ($20 billion), according to the state-backed Game Publishing Committee.

Declining revenue

ZX did far worse than the broader sector, reporting revenues for its high-margin self-operated games fell by a stunning 35% in the first six months of 2023 to 2.1 billion yuan. Revenue from its lower-margin collaborative business with other game companies and distributors fell by a milder 6.8% to 1.1 billion yuan.

Equally worrisome was a decline in the company’s monthly average users (MAUs) for its games, which fell to 8.7 million in the latest six-month period from 9.3 million a year earlier. Monthly paying users (MPUs) declined at an even steeper rate to 1 million in the latest period from 1.7 million a year earlier. One small piece of good news saw average revenue per paying user rise by more than 20% to 509.4 yuan in the latest six-month period from 419.3 yuan a year earlier.

ZX’s gross margin for the self-run games was largely unchanged year-on-year at 95.2%, though the margin for collaborative games fell nearly 3 percentage points year-on-year to 16.4%. While the revenue declines were hardly cause of celebration, ZX did report some good news with a 26% rise in its adjusted profit for the period to 433 million yuan from 345 million yuan in 2022.

In addition to its core gaming business, which accounts for about 96% of revenue, the company also owns two small but fast-growing consumer products that collectively generated 126.7 million yuan in revenue in the first half. One of those is a noodle business, Zha Zha Hui, named after Hong Kong singer and actor Zhang Jiahui.

The other is a line of themed collectible toys featuring a character called Bro Kooli, with a broccoli shaped head, sold from opaque “blind boxes” so buyers can’t see what they’re buying until they open the box after a purchase. But such mystery boxes have also fallen afoul of authorities lately after a craze that included pets being sold in boxes. As a result, new guidelines issued in June restrict sales to minors under the age of eight without the consent of guardians.

The interim report noted that ZX declared a special dividend of 50 million yuan in August, just before the listing, half of which would have gone to founder Wu Xubo since he holds 49.5% of the company’s shares post-IPO.

The payout’s relatively small size may owe to ZX’s small cash holdings, which stood at 326 million yuan at the end of July, according to the company’s IPO prospectus. That amount would have risen sharply after the IPO, but is still relatively small at the equivalent of less than $80 million. The company held trade payables of 518 million yuan and bills payable of 4.9 billion yuan as of the end of July.

Despite its flagging revenue, ZX and its peers may be well positioned to benefit from a broader rebound in their sector as Chinese gamers get back to having fun following a difficult three years caused by the pandemic and regulatory tightening. China’s Game Publishing Committee said the number of gamers reached a record of 668 million in the first half of 2023, and that the country granted more game licenses in the first six months of this year than in all of 2022.

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