Key Takeaways:

• CMGE Technology announced it was buying the international rights to the game “The Legend of Sword and Fairy” from Taiwan’s Softstar Entertainment
• The Chinese gaming company looks to be speeding up an overseas push to offset intense competition in its home market

By Fai Pui

It has been an action-packed year for the producer of the hit game “Black Myth: Wukong”, an adventure story featuring a legendary ape-like hero.

Since its release on Aug. 20, the title has injected new life into China’s battered gaming market and has blazed a trail for more Chinese-themed blockbusters to find a receptive overseas audience.

Based on a mythological character from Chinese literature, the role-playing epic has earned its makers $960 million in revenue so far, according to industry data, becoming one of the fastest-selling games on record. The release helped boost total gaming revenue in August to 33.64 billion yuan ($4.77 billion), a year-on-year leap of 15%.

Less than a month after the launch, the game’s maker, CMGE Technology Group Ltd. CMGEF, bought the international rights to another hugely popular game, “The Legend of Sword and Fairy”, from Taiwan’s Softstar Entertainment for 18.3 million yuan. In addition, Softstar was allotted 38 million new CGME shares at an issue price of HK$1.68 per share, a premium of 140% over the closing price on the day the deal was announced, giving it a 1.31% stake in the Chinese company.

“The Legend of Sword and Fairy” is an entertainment classic drawing on Chinese legends and fantasy stories, known to every avid gamer. Developed and distributed by Softstar, the game was released on the MS-DOS platform in 1995 before launching on Windows and Sega’s Saturn console. The game was remade in 2001 to enhance the image quality and has scored a hit with many Chinese players born in the 1980s and 1990s. CMGE bought the Chinese mainland rights to the game in August 2021, gaining complete IP control with the deal announced in mid-September.

The game earned total revenue of HK$41.35 million ($5.3 million) in 2022, with a pre-tax profit of HK$25.65 million, according to data in the announcement. But last year the game’s revenue plummeted to HK$11.19 million, generating a pre-tax loss of HK$5.22 million.

However, consolidating the rights to the game could release new revenue possibilities.

Independent stock analyst Ivan Chow said CMGE was probably aiming to link the computer version of the game and its mobile equivalent, enhancing the IP value amid a burst of enthusiasm for Chinese heritage themes in the wake of the “Black Myth: Wukong” sensation.

Over decades of careful cultivation, “The Legend of Sword and Fairy” has grown into a brand ecosystem spanning games, comics, literature, reality entertainment, film, television, animation, music, virtual idols and derivative products. In announcing the deal, CMGE signaled an intention to further develop the brand, vowing to deepen and spread the influence of Chinese stories and Chinese culture.

Like a thwarted action hero, China’s gaming industry is in urgent need of a comeback, after battling through repeated regulatory crackdowns over recent years. As part of a sweeping campaign to rein in the Internet sector, the Chinese government sought to curb compulsive gaming, slapping limits on the permitted playing time for minors and on tips for hosts, while new game products were subjected to a drawn-out approvals process.

Loosening The Grip

However, the attitude is shifting as the authorities looks for ways to boost China’s faltering economy. The success of “Black Myth: Wukong” underlines the sector’s potential as a growth engine, bolstering the case for state support. In a clear sign of a shift, China’s media watchdog approved 117 domestically developed video games last month, more than in any other month this year.

“Chinese games can act as an important medium for China to project its soft power around the world, and the success of ‘Black Myth: Wukong’ serves as a powerful example,” said analyst Chow. It would not be in the government’s economic interests to keep applying regulatory pressure, which could deter investment, hurt player experiences and shrink the value of the gaming sector, he said.

CMGE appears to be sensing a policy pivot, stepping up collaborations this year to expand its reach. In April, it forged a strategic partnership with HashKey Group to jointly develop blockchain-based Web3 games and platforms. In the same month it tied up with an e-sports company, Guangzhou Chaojing Investment, seeking to tap into the potential for competitive gaming. The owner of CMGE’s e-sports partner, Edward Zhu, has also been taking an equity stake to cement the relationship. In the latest purchase in July, Zhu bought 100 million CMGE shares at HK$1.68, an 87% premium over the market price. With a 9.68% stake, he now ranks as the company’s third-biggest shareholder.

Since the tie-up, the partners have been working to build cross-channel links and develop a growing base of low-cost users for CMGE’s proprietary games. Meanwhile, CMGE can piggyback on its partner’s international channels to drive an overseas expansion, which was also a motivating factor in the rights deal with Softstar.

CMGE has been looking to diversify its gaming portfolio away from small, mobile games, which is a fiercely competitive segment of the industry, said analyst Chow. In that mobile arena, brand loyalty takes considerable time and a big marketing budget to develop, he said, but players can still be fickle and switch to other platforms.

The company’s finances reflect the battle for players’ attention. In first-half earnings released in June, CMGE’s  revenue fell 19.7% to 1.23 billion yuan and its number of monthly paying users slipped 9.2% to 1.03 million,  with average revenue per paying user (ARPPU) falling 11.5% to 200.2 yuan.

After the company bought out the rights to “The Legend of Sword and Fairy”, its stock rallied 7%. The firm now trades at a price-to-sales (P/S) ratio of 0.81 times, slightly higher than the 0.71 times for NetDragon (0777.HK) and 0.75 times for IGG (0799.HK), but far below the multiple of 3.4 times for NetEase (9999.HK).

There could be more upside for CMGE, aside from the unwinding of regulations, if cuts in U.S. interest rates help fuel a broader rally on equity markets in mainland China and Hong Kong.

This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.