With an announcement, China Mobile Games (00302) surged 20% in two trading days. The long-term value of this leading global IP gaming operator is being exploited by the market.

This announcement revolves around the appointment of new directors. At this point in time, it was also interpreted by the market as China Mobile Gaming's determination to “keep things safe,” and the market immediately gave positive feedback.

The Zhitong Finance App learned that after China Mobile Games announced that Pearl River Investment Director Jiang Yukai joined its board of directors, the two consecutive trading days rose by 12.75% and 6.09% respectively, with a cumulative increase of 20%. The company's trading volume has increased markedly, and the core characteristic is the continuous inflow of Hong Kong Stock Connect capital. Hong Kong Stock Connect made net purchases for 7 trading days from April 16 to 23. During this period, the market value of Hong Kong Stock Connect's holdings increased by about HK$100 million.

China Mobile Games (00302) is determined to “keep it safe”. Is this an opportunity to get on the bus, or is it just a flash of time? According to the Zhitong Finance App, it may be an opportunity to get on the bus.

In fact, the incident where Jiang Yukai joined the board of directors of China Mobile Games was only the reason for a “big rise”. E-sports investment boss Zhu Yihang is a firm strategic investor in the company and has held shares for 3 years. He is optimistic about the company's fundamentals and future prospects. This time, competent personnel will be appointed to take part in management decisions, and the market may have long anticipated it. Most of the capital from the Hong Kong Stock Exchange and Hong Kong Stock Connect is rational capital. Continued inflows are not only affected by the announcement, but also a consideration of these “three dimensions”.

So, what exactly are these “three dimensions”?

The first dimension: capital operation dimension

The Zhitong Finance App learned that Zhu Yihang is a strategic investor in China Mobile Games. In April 2021, he joined Bilibili and Shengtian Network to participate in the subscription for shares distributed and issued by China Mobile Games, subscribed for 56.4 million shares, and has held them so far. This time, Jiang Yukai will be appointed to join the board of directors of China Mobile Games. At this point in time, Jiang Yukai will act as the investment director of Pearl River Investment Management, and the market predicts that it will make a big move.

In fact, 2023 is the first year of AI. Generative AI gradually matures technology applications from text to video production. Various industries, including automobiles, computers, and mobile phones, are beginning to take the lead in laying out the market cake under the big model, and games are one of the most promising application scenarios for AI. Meanwhile, China Mobile Games has a leading edge in AI layout. Jiang Yukai once mentioned that China Mobile Games, as a Hong Kong stock game company with the core advantages of AI+IP+ game products, will also launch its self-developed product “Fairy Sword World” this year. He is convinced that the company's long-term growth value will gradually be recognized.

“Fairy Sword World” will be the first Chinese mobile game in the world's Guofeng Xianxia virtual world, and the market attention is very high. As the leading target of AI games, industry investors are eyeing it. As a strategic shareholder, Zhu Yihang has a priority advantage over external investors, and its layout in the game field has formed a relatively complete e-sports industry ecosystem for many years. This time, it has increased its penetration in the game development field, extended upstream and downstream, or tried to improve the layout of the industrial chain. It is worth mentioning that Zhu Yihang has a well-known gaming e-sports team, EDG eSports Club, which has many resources for MCN game experts, and it is not ruled out that there will be more cooperation with China Mobile Games on “Fairy Sword World”.

Jiang Yukai is Zhu Yihang's strongest player. It is likely that he will participate in the integration of Zhu Yihang and Chinese mobile game resources, integrate e-sports resources with IP game resources, and achieve an effect of 1+1 greater than 2. Investment in AI games will be the highlight. Pearl River Investment's total assets exceed 64 billion yuan, and its capital strength is strong. It is not ruled out that Zhu Yihang will continue to increase its holdings in China Mobile Games, and will use China Mobile Games as a listing platform to seize the feast of the AI era through investment, acquisitions, and restructuring.

Capital operations are expected not only in asset-side and business-side acquisitions, restructuring, and integration; in the secondary market, China Mobile Games is beginning to focus on market capitalization and shareholder returns. On March 28, China Mobile Games announced that the board of directors decided to use a share repurchase license to use up to HK$100 million to repurchase shares in the open market, and announced again on April 23 that it would purchase no more than 10% of the total number of shares issued by the Japanese company when the share repurchase authorization was approved, that is, a maximum of 275,267,200 shares, which is approximately HK$325 million at the current price.

On April 25, according to Disclosure Easy's equity disclosure, China Mobile Games Chairman and CEO Xiao Jian also increased his holdings by 750,000 shares, with an average price of HK$1.211 per share, with a total amount of HK$9802,500. After the increase in holdings, the latest number of shares held was about 782 million shares, and the shareholding ratio increased to 28.39%.

The above capital operations all prove that management and shareholders are optimistic about the company's development, guide the discovery of market value, and have been recognized by market capital, especially Hong Kong Stock Connect.

Second dimension: Hong Kong Stock Connect adjustment dimension

Among investors investing in mobile games, the biggest advantage is the market capitalization premium. Hong Kong Stock Connect funds are flocking into China Mobile Games. One of the biggest possibilities is that Hong Kong Stock Connect will soon face regular adjustments, and China Mobile Games will also face the end of a 12-month review and whether to maintain Hong Kong Stock Connect's status, which will lead to a market value revaluation. Hong Kong Stock Connect adjustments include regular adjustments and temporary adjustments. Regular adjustments are made every six months.

The coverage of Hong Kong Stock Connect is the Hang Seng Index Composite Index. The semi-annual index review begins and ends at the end of June and December, respectively. They all correspond to a period of one year, and the performance of Hong Kong Stock Connect's internal and external indices is transferred in and out of the average 12 months at the end of the month. Trading volume and market value at the end of the month are the core indicators of the Hong Kong Stock Connect adjustment. In terms of trading volume, they must meet the minimum requirement of 0.1% in at least 10 months in the past 12 months; in terms of market capitalization, they need to rank 95% of all main boards, and have a market value of HK$4 billion or more at the end of the 12 months of the review date.

Chinese mobile games are already part of the Hong Kong Stock Exchange Standard; as long as they meet the core conditions, they will not be transferred out. Since July 2023, the company's daily exchange rate has been in the 0.1-1% range, meeting the trading volume requirements; the company's average month-end market value of HK$3.6 billion during the period was slightly lower than the Hong Kong Stock Connect conditions. However, according to relevant software, the company's market capitalization ranked 91% in the Hang Seng Composite Index, which met Hong Kong Stock Connect requirements.

China Mobile Games is likely to remain on the Hong Kong Stock Exchange. The main ones are: first, the market capitalization conditions are relatively close, and it is relatively easy to achieve; second, the company is a high-quality target in the mobile game sector, and is also a scarce target in the AI gaming sector. The mainland's large capital is unwilling to miss and is strongly willing to boost; third, under the influence of policies, markets and sectors, the valuation will drop sharply. The undervaluation during the Hong Kong Stock Connect adjustment period will also receive capital attention.

In fact, capital for Hong Kong stocks is scarce, but the mainland has plenty of capital. Hong Kong Stock Connect is the core channel for domestic investment. From a statistical point of view, domestic capital contributes more than one-third of the trading volume of the Hong Kong stock market. In the undervalued Hong Kong stock market, large mainland investors prefer to get investment opportunities with high-quality targets, while China Mobile Games is naturally favored by domestic investors as growth mobile targets, and continues to invest and share the company's development results through the Hong Kong Stock Connect channel.

The third dimension: the fundamental dimension

In fact, whether it is capital operation or Hong Kong Stock Connect adjustments, all driving dimensions are inseparable from the strong fundamentals of Chinese mobile games. With IP as the core, China Mobile Games provides premium IP games to players around the world through independent research and development. The performance in previous years was resilient. Growth was steady until 2021. Affected by the epidemic and version policy in 2022, the impact of the epidemic and version policy was eliminated. After the impact of 2023 was eliminated, its own IP games returned to a double-digit growth trajectory.

With its superior IP resources, the company continues to work in the three business segments of IP game development and global distribution, its own IP operation, and the Guofeng Yuanuniverse platform. Its China Fengyuan Universe platform will create an AI-leading work, “World of Fairy Sword.” “Fairy Sword World” is the first Guofeng Xiaxia-themed open world game in China. It received the version number in June 2023. The reservation campaign has now begun. The number of reservations has exceeded 4 million, and two tests have been carried out within 2023. Billing tests to verify the product's ability to monetize before launch will also soon begin, and it is scheduled to be officially launched in 2024.

Mobile games have high performance expectations in 2024. On the one hand, there are plenty of game reserves. It is planned to launch various blockbuster IP games such as “Battle for the Sky: Summit Showdown”, “Doulo Continent: Reversing Time and Space”, “Naruto: Master Konoha”, and “The Legend of Cao Cao Cao of the New Three Kingdoms” in domestic and overseas markets. On the other hand, the blockbuster Guofeng Xianxia virtual world game “Fairy Sword World” will be successfully launched. Due to its high popularity, open world gameplay makes users willing to pay, and it is expected that users will be willing to pay. In addition, in the mini game sector, the company has also stocked up nearly 10 games, which is expected to increase more than last year's revenue of 600 million from the 3 mini games. Meanwhile, major investment banks are optimistic about the company. Among them, CMB International expects its 2024 revenue to increase 32% year-on-year, with a target price of 2.9 yuan.

In the capital market, the valuation of the mobile game sector has been suppressed by the version policy for a long time. In July 2021, the State Press and Publication Administration published the final domestic online game approval information for that month. Since then, the version has been suspended for more than 260 days, and it only reopened in April 2022. Affected by the version policy, the mobile game sector's valuation declined for three consecutive years from 2021 to 2023. Individual stock valuations declined severely, and some target valuations reached historical troughs.

Referring to policy-sensitive industries, policy decline generally takes 1-3 years, then the valuation is reversed. For example, in the education and training industry, a double reduction policy was introduced in 2021. In that year, most individual stocks directly plummeted 90% and directly reached the bottom of the policy. After a year of adjustment, they re-entered the upward channel. New Oriental's market value increased 2.9 times for three consecutive years. The mobile game sector faces policy bottom-line and cycle rotation opportunities. As a leader in the sector, mobile games in China are bound to be sought after by market capital.

It is worth noting that in the mobile game sector of the Hong Kong stock market, China Mobile Games is one of the few targets that have announced large repurchases and the few that will launch AI games. At the same time, the company is also favored by market capital, investment banks, company management, and strategic investors. With the combined efforts of long-term value capital and short-term hot capital, the company's valuation is expected to continue to be bullish in the short to medium term, and the market value is still high.