XD Inc Announces Details of Proposed Listing on the Main Board of The Stock Exchange of Hong Kong Limited
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Investment Highlights
- XD ranked fifth among PRC game operators who earned a majority of game operating revenue overseas in 2018
- XD operates TapTap, the largest game community and platform in China by average MAUs in 2018 , creating strong synergy with its online games. "Information service" business under TapTap generated revenue of RMB294.5 million in 2018, with gross margin at 88.0%
- As of 30 September 2019, the Group operates 42 online games and 12 pay-to-play premium games covering a diverse portfolio of games across different genres; its game pipeline included 11 online games and seven premium games expected to release by 2020
- For the nine months ended 30 September 2019, the average MAUs and the average MPUs of the Group's online games reached 19.2 million and approximately 640,300 respectively
- With established overseas game publishing and operating capabilities, the Group offered its games in over 100 countries and regions across the globe. For the five months ended 31 May 2019, its overseas markets accounted for 67.8% of its game operating revenue
- From 2016 to 2018, the Group's revenue and profit for the year surged at a CAGR of 57.0% and 288.5% to RMB1,887.1 million and RMB352.7 million respectively
Offering Details
The Group intends to offer an aggregate of 63,600,000 shares (subject to the over-allotment option), of which 57,240,000 shares (subject to reallocation and the over-allotment option) are international offer shares and the remaining 6,360,000 shares (subject to reallocation) are Hong Kong public offer shares. Assuming an offer price of HK$13.45 per share (being the mid-point of the offer price range between HK$11.10 and HK$15.80 per share) and the over-allotment option is not exercised, the estimated net proceeds from the global offering will amount to approximately HK$769.6 million after deducting underwriting commissions and other estimated expenses paid and payable by the Group in connection with the global offering.
The Hong Kong public offer will commence on 29 November 2019 (Friday) and will end at noon on 5 December 2019 (Thursday). The final offer price and allocation results will be announced on 11 December 2019 (Wednesday). Trading of the Group's shares is expected to commence on the main board of HKEX on 12 December 2019 (Thursday), and the shares will be traded in board lots of 200 shares each. CLSA is the Sole Sponsor, Sole Global Coordinator, Joint Bookrunner and Joint Lead Manager of the listing, while BOCI Asia Limited, ICBC International Capital Limited and Zhongtai International Securities Limited are the Joint Bookrunners, and BOCI Asia Limited, ICBC International Securities Limited and Zhongtai International Securities Limited are the Joint Lead Managers.
Within the International Placing, four cornerstone investors, namely Bytedance (HK) Limited, miHoYo Limited, Lilith Mobile Company Limited and Nikkigames HK Limited have agreed to subscribe at the Offer Price for an amount of US$10 million, US$5 million, US$5 million and US$3 million respectively, representing an aggregate amount of US$23 million (equivalent to approximately HK$180 million) in total.
Investment Highlights
Proven track record of developing and operating popular games
The Group takes pride in the quality of its popular games, featured with well-known intellectual property rights, exquisite graphic designs, interesting and attractive storylines and characters, and user-friendly interface which gamers tend to be attracted to or actively participated in or paid for, such as Ragnarok M, Shen Xian Dao (HD) and Sausage Man. As of 30 September 2019, the Group had 42 online games in operation, comprising many popular games in the major game genres of RPG (Ragnarok M and Shen Xian Dao (HD), CCG (Girls' Frontline), SLG (Heng Sao Qian Jun) and battle arena game (Sausage Man). These five popular games attracted an aggregate of over 120 million gamers since launch.
The Group enjoys a good reputation and received acclamation from industry peers and gamers for its operating capability. For example, through adapting the web version of Shen Xian Dao to a mobile version and enhancing marketing efforts to attract new gamers, the Group extended the life cycle of this game to over eight years, which is substantially longer than comparable online games. For Sausage Man, the game has become widely popular among gamers in China since its launch in April 2018, and ranked first on the free game chart of App Store in China for five consecutive days in October 2018. This game's average MAUs exceeded 11 million in the nine months ended 30 September 2019, and the cartoon adaptation of this game attracted over 3.5 billion views as of 30 September 2019. In addition to online games, the 12 premium games operated by the Group are believed to further enrich its game portfolio and enhance its brand recognition among core gamers. For example, the Group had sold over 2.8 million copies of ICEY, one of the premium games, across all platforms globally as of 30 September 2019.
Vibrant and engaging game community and platform
TapTap, co-founded by X.D. Network Inc. (XD's PRC Consolidated Affiliated Entity), was the largest game community and platform in China . TapTap has not only created a vibrant and engaging mobile game community that attracts and retains gamers, but also serves as a powerful distribution, testing and evaluation platform for game developers, which further enables the Group to monetize its user base.
Since its inception in 2016, TapTap has been dedicated to introducing high quality games to its users and connecting gamers and developers. As of 30 September 2019, it made available over 6,500 mobile games for gamers to download, and news and information on over 41,000 games on TapTap. Gamers are encouraged to review, discuss and rate games on TapTap which attracted a large amount of social networking interactions. By 30 September 2019, 693.8 million game downloads, 574.9 million game follows and 10.6 million game reviews on TapTap were recorded. TapTap established an independent rating system, and game rating on TapTap is the most authoritative reference for mobile games in China, according to Frost and Sullivan. As of 30 September 2019, there were 52.1 million registered users on TapTap, and its mobile app's average MAUs quickly rose to 17.0 million in the nine months ended 30 September 2019.
TapTap is also a game platform pioneering a free-to-distribute model in China. As of 30 September 2019, TapTap attracted over 10,000 game developers. In addition to game distribution, it also provides developers with a range of value-added services, such as game testing and user data analysis, to enable them collect and analyze gamers' feedback to optimize their games. In addition, developers can place game advertisements on TapTap to achieve more targeted marketing. Revenue from information services business, comprising primarily online marketing services provided by TapTap, contributed 17.1% to total revenue of the Group as at 31 May 2019.
Established overseas game publishing and operating capabilities
As one of the pioneers of China-based game developers and operators that entered the overseas markets, XD is committed to introducing high quality games to more people across different countries. As of 30 September 2019, it operated 30 of its 42 online games and seven of its 12 premium games in overseas markets, including Hong Kong, Macau, Taiwan, Japan, South Korea, Southeast Asia, North America, South America and Australia. Its overseas user base is large with exceeding 37.3 million users as of 30 September 2019. In 2018, the Group's game operating revenue from overseas markets reached RMB976.7 million, accounting for 61.5% of the Group's game operating revenue. And its proportion to the total revenue rose further to 67.8% for the five months ended 31 May 2019. In addition, XD ranked first among all PRC game operators in the mobile game market of South Korea .
The Group has an experienced overseas publishing team, consisting of 145 employees as of 30 September 2019, while engages a number of overseas consultants to support its overseas operations, such as implementing marketing activities, quality control and organizing industry events. Leveraging its in-depth understanding of the fast-changing global game industry, dynamic user preferences and complex distribution and payment networks in different geographical markets, XD helps PRC game developers effectively enter the international markets with one-stop services, such as game redesign and localization, optimization, marketing, distribution and payment support. The Group also partners with leading distribution platforms, such as App Store and Google Play, to take advantage of its global user base and mature payment system.
Excellent game development and data analytics capabilities
Strong independent research and development capability is believed to be critical to XD's long-term growth. In recent years, the Group enhanced its game development capabilities by building a strong research and development team, which consisted of eight game development studios and 552 employees as of 30 September 2019. As of 30 September 2019, the Group launched ten self-developed games including complex online games, such as Ragnarok M and Heng Sao Qian Jun. In 2018 and the five months ended 31 May 2019, the Group generated RMB925.7 million and RMB605.5 million from its self-developed games, accounting for 58.3% and 70.9% of the game operating revenue of the same period respectively. More importantly, as of 30 September 2019, the Group was developing five online games in the game pipeline, which are expected to release by 2020. As of the Latest Practicable Date, the Group had 11 registered patents, 103 registered software copyrights and 123 registered work copyrights in China.
Experienced management team dedicated to innovation
XD's experienced senior management team is led by its founder and chief executive officer, Mr. HUANG Yimeng and its co-founder and president, Mr. DAI Yunjie - both are successful serial entrepreneurs having over 13 years of experience in games, telecommunications, technology and internet industries. As gamers themselves, the founders have a shared passion for great games and have gained a deep understanding of the game industry. As of the Latest Practicable Date, the Group's senior management members also have over ten years of average experience in game and internet related industries. Leveraging their rich industry experience, in-depth insight in game trends and solid dedication to the game industry, the management team has successfully established a proven track record of successful game development, publishing and operation in both China and overseas.
Strong market potential
According to Frost & Sullivan, the global game market is expected to grow to US$214.7 billion in 2023, representing a CAGR of 8.9% from 2018, while the global mobile game market at a CAGR of 11.3% from 2018 to US$133.0 billion in 2013.
Future Strategies
Further enhance game portfolio
The Group aims to offer and operate world-class mobile games serving the global markets. To enrich its game portfolio and attract more gamers, it intends to continue to develop, discover and offer high quality, seasoned games through (i) improving its in-house development capabilities through increasing investment in information technology infrastructure, recruiting experienced game development personnel, and enhancing its expertise in visual designs and sound effects; (ii) licensing popular games from both leading and emerging game developers, especially in China, Japan and South Korea; and (iii) collaborating with PRC and overseas game developers and content providers to adapt popular games and cultural contents into mobile games.
Increase active user base and engagement of TapTap
The Group will continually attract both gamers and developers to join the community of TapTap and further improve its engagement through (i) improving and upgrading the content recommendation algorithm of TapTap to more effectively capture and serve gamers' needs; (ii) enhancing the search function of TapTap to help gamers locate useful resources efficiently; (iii) strengthening its community function, such as adding more sub-forums, and implementing both online and offline marketing strategies to increase gamer engagement; (iv) providing more advanced developer tools on TapTap that facilitate game developers to better interact with gamers to improve their game experience; and (v) releasing overseas versions of TapTap with localized features to serve gamers and game developers globally.
Deepen overseas operations
The Group expects to expand its game publishing and operating business in both existing and new overseas markets, mainly through (i) cooperating with reputable game developers for publishing their games in the PRC and overseas markets; and (ii) establishing regional headquarters in overseas markets for better managing its overseas game operating business. In respect of its current major overseas markets, it plans to maintain and further increase its presence by offering quality games and focusing on better game localization, engaging qualified foreign consultants for advice and reaching out to more local partners for collaboration. Meanwhile, it closely monitors the market trends of the countries and regions with great potential such as Europe and North America for opportunities. It also plans to continue to participate in international game events or exhibitions to promote our brand recognition globally.
Upgrade information infrastructure and technology
The Group believes that investing substantial resources in information technology can effectively empower its business in the fast-growing and evolving game industry. The Group intends to upgrade its information infrastructure and technology for its game operations through (i) recruiting and retaining skilled personnel, especially visual art designers, and adding new servers and adopting upgraded cloud services; and (ii) improving its data analysis system to enhance its understanding of gamers' needs through analysis of user behavior, and improving its anti-cheating system to achieve better gameplay experience and gamer information security. Meanwhile, the Group plans to strengthen its game recommendation algorithms and user data analysis capabilities on TapTap, to allow it to effectively implement distribution and marketing strategies and improve user retention rate and monetization of its games.
Seek strategic investments and acquisitions
XD plans to make selective and strategic investments in, and acquisitions of, businesses in China and overseas that can be synergistic to its existing operations, including game studios with strong game development capabilities, companies with advanced technologies or valuable intellectual property contents, and local companies with operating expertise and connections in local markets. It is also interested in acquiring or investing in suitable game service providers specialized in visual and sound effects, which can improve the quality of its self-developed games. In addition, it plans to invest in local game distribution platforms and game communities to enhance the synergies between its game operating business and TapTap. It is expected that each investment to be of the size from RMB3 million to RMB50 million.
Use of Proceeds
Assuming an Offer Price of HK$13.45 per share (being the mid-point of the offer price range of between HK$11.10 and HK$15.80 per share) and that the over-allotment option is not exercised, after deducting the underwriting commissions and other estimated expenses paid and payable by the Group in connection with the global offering, net proceeds are estimated to be approximately HK$769.6 million and will be used to:
Item / Percentage
Developing games and game-related technology: 35%
Developing TapTap: 30%
Expanding game publishing and operating business: 15%
Selective and strategic investments and acquisition: 10%
Working capital and general corporate uses: 10%
Financial Highlights
(RMB'000) Year ended 31 December Five months ended 31 May
2016 2017 2018 2018 (unaudited) 2019
Revenue 765,521 1,344,399 1,887,108 758,604 1,033,032
Gross profit 340,724 602,748 1,110,799 442,490 691,767
Profit for the year/ period 23,370 120,537 352,721 157,425 267,522
Gross margin 44.5% 44.8% 58.9% 58.3% 67.0%
Net profit margin 3.1% 9.0% 18.7% 20.7% 25.9%
About XD Inc.
XD Inc. is a top five PRC game operator who earns a majority of game operating revenue overseas . The Group also operates TapTap, the largest game community and platform in China . As of 30 September 2019, the Group operates 42 online games including RPG (Ragnarok M and Shen Xian Dao (HD)), CCG (Girls' Frontline), SLG (Heng Sao Qian Jun) and battle arena game (Sausage Man), with an average MAUs of its online games at 19.2 million for the nine months ended 30 September 2019; and 12 pay-to-play premium games, such as ICEY and Muse Dash. With established overseas game publishing and operating capabilities, the Group ranked first among all PRC game operators in the mobile game market of South Korea in 2018 .
Investor Relations Website: https://ir.xd.com
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