2022 was a challenging year for the game industry. Due to the pandemic and gaming regulations, the gaming industry experienced a reduction in both revenue and user scale. In the context of pervasive uncertainties and low expectations, the market has focused on gaming company plans and financial reports.
According to the latest financial report published by CMGE Technology Group Ltd (0302.HK), operating revenue in 2022 was RMB 2,714 million, a year-on-year decrease of 31.4%, with a net loss of RMB 217 million. However, on the day after the financial report was released, CMGE’s share price jumped and closed with a one-day increase of 8.78%.
The financial report from CMGE shows that the industry continues to be affected by external factors from previous years, according to analysts. But CMGE’s share price bucked that trend, which demonstrates new confidence stemming from the financial report and anticipated business performance.
- Strong operating revenue, with an increase of 69.5% in R&D investment
CMGE earned RMB 2,114 million from its game publishing business, RMB 453 million from its game development, and RMB 147 million from its IP licensing business. In addition, CMGE achieved a gross profit rate of 41.0%, a year-on-year increase of 3.8%, demonstrating the high profitability of its core businesses.
Mr. SIN Hendrick, Executive Director and Vice Chairman of CMGE, explained at the performance meeting that the loss of profits resulted from CMGE’s provision of investment impairment and other non-operating expenses of RMB193 million from companies in which CMGE invests. In addition, CMGE’s provision of non-operating financial and contractual asset impairments of RMB 137 million was also a factor. If non-operating impairment and other non-operating expenses were not included in financial accounting, CMGE would have achieved profits from its operations in 2022. According to analysts the provision of impairment is based on the prudence principle of accounting and impacts financial results on a one-time basis.
In response to uncertain external factors, gaming companies have focused on cost reductions and efficiency improvements in recent years. CMGE has long been engaged in R&D and continuously increasing investment in this area, while reducing unnecessary costs and improving its gross profit. According to the financial report, CMGE invested RMB 527 million in R&D in 2022, a record year-on-year increase of 69.5%. Meanwhile, R&D personnel reached 650 employees, accounting for 55.8% of CMGE’s total staff.
Supported by continuous investment, CMGE has fully implemented its strategy for independent development of quality products, ensuring supplies of such products and laying a solid foundation for the start of its second growth curve. Furthermore, the results achieved by CMGE in game development in 2022 show the company’s strong ability to independently develop quality games.
In the first month after its launch in the domestic market, “The King of Fighters: All Stars”, a 3D mobile game independently developed and distributed by CMGE, stood at the top of the free games ranking in Chinese mainland’s Apple App Store. As of December 31, 2022, “Legend of Sword and Fairy 7”, developed and launched by CMGE in the second half of 2021, had seen total sales of more than 510,000 PC units, 210,000 cloud-based units, and 70,000 host units.
Meanwhile, subject to continuous optimization and meticulous management, “The World of Legend – Thunder Empire” and “Legend of Dragon City” and other existing games have been generating recurring income and profit for CMGE as well.
Through developing and maintaining games with strong IP components, CMGE is clearly seeking greater possibilities in global markets.
- Three-year R&D efforts are expected to produce superior results
Xiao Jian, Executive Director, Chairman and CEO of CMGE, said at the performance meeting, “CMGE is making every effort to build the first Chinese-style metaverse-style game with open elements in China – a ‘Chinese Paladin: Sword and Fairy World’. We will launch its conceptual PV on April 20 and its real PV on April 27, and implement initial testing around late May and early June this year.”
“Sword and Fairy World” was developed for Chinese fans of the franchise by Starry Sky Studio under CMGE based on Chinese Paladin IP. By introducing the model of ‘game, entertainment, community, consumption’ the game will offer a real-virtual open world for creation and sharing by players. To create Sword and Fairy World a specialized R&D team at CMGE has spent three years and invested heavily to develop such a game independently.
Industry insiders agree that “Sword and Fairy World” is a hotly anticipated game from CMGE for players and investors alike as it boasts major features of a long-term popular gaming brand.
Firstly, developed based on CMGE’s Legend of Sword and Fairy IP, the game is naturally expected to be well received by players. According to data, that game has more than 600 million users in China and elsewhere around the world.
Secondly, it is an immersive mythology-based game developed by CMGE after three years of R&D. With eight major technological innovations such as 24-hour lighting, a dynamic weather system, real water flow effects, non-player character (NPC) AI, open world technology, simultaneous online capacity for millions of users, high-definition modeling, multi-dimensional facial graphics, as well as UGC creation tools, it opens a Chinese Paladin world, filling a key gap in this sector. As one of the first partners of ERNIE Bot, CMGE uses AIGC technology for intelligent NPC interaction, marketing, script creation and art production for game R&D, which reduces costs and improves efficiency.
Thirdly, “Sword and Fairy World” focuses on open elements while introducing the latest metaverse elements. In the game, the Chinese Paladin Metaverse provides experiences such as UGC creation, leisure, social entertainment, and virtual performances. “Chinese Paladin: The World” engages players in the construction and development of this metaverse that is independent from the real world.
2023 will mark a milestone for CMGE. With the normalized distribution of games under regulatory supervision, CMGE will release its new products to the market step by step. Since obtaining authorization from gaming authorities, several mobile games, including “Cultivation Fantasy” and “Sword and Fairy: Wen Qing” are scheduled for release in the first half of 2023. More importantly, the launch of CMGE’s self-developed game, “Sword and Fairy World” is expected to support future sustainable growth and further improve the company’s performance.
In terms of the long-term significance of “Sword and Fairy World”, CMGE wishes to implement the concept of ‘Games as Platforms’. The company also expects to achieve its strategic vision of incorporating IP-based game ecosystems with own well-known IP brand and the Chinese Paladin Metaverse platform, while building itself into an outstanding gaming company with sustainable growth and popular products.
Focusing on player-centered services and quality products, CMGE is comprehensively developing its own IP-related business and striving to create new areas of growth. As Xiao Jian said, “As long as we concentrate on product development and player services, results will surely be achieved.”
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