China's video-game bulls are running out of lives

Hong Kong

CHINA'S video-game enthusiasts may be running out of lives. Tencent-backed developer iDreamSky is set to list in Hong Kong at a hefty discount to its peers, as Beijing's crackdown on the sector takes its toll. That suggests valuations have further to fall.

The Shenzhen-based mobile games outfit raised US$107 million in its initial public offering, selling shares at the lower end of its expected range.

That values the company at US$1.1 billion, including an over-allotment option - not bad, considering just two years ago founder Chen Xiangyu took the then Nasdaq-listed company private at closer to US$680 million.

The detail is less encouraging, though. The debut price is less than 10 times expected 2019 earnings, a person familiar with the deal told Breakingviews.

In contrast, China's top two gaming companies, the US$380 billion Tencent and the smaller NetEase, changed hands at almost 30 times.

A heavy-handed clampdown on the world's largest video-games market is one explanation. iDreamSky says in its listing prospectus that it has not received any regulatory approvals to release new games in China since March, confirming an unofficial and indefinite ban.

Meanwhile, officials there have publically criticised video games as being too addictive, and blamed them for adolescent near-sightedness. Over half of iDreamSky's pipeline of 25 new games may be impacted.

Add to that a waning appetite for new offerings. Two Chinese technology companies recently went public in Hong Kong, both at lower valuations than those achieved in earlier private transactions.

Even heavyweight Tencent has reduced and delayed its US$1.2 billion spinoff of its music-streaming arm. It is now set for this month, IFR reported on Monday.

iDreamSky has support, including from Tencent, which owns roughly a fifth of the company, and Sony, the Japanese outfit behind the PlayStation console. That may be enough to help these gamers up to the next level.

Still, Tencent and NetEase have shed a combined US$130 billion in market value in the first 11 months of the year.

iDreamSky's sombre return to the public market points to more gloom ahead.

The company sold 127 million shares at HK$6.60 per share, the lower half of the marketed price range. REUTERS