China Mobile Games: De-Listing Ahead?

Jun.20.14 | About: China Mobile (CMGE)

Another US-traded Chinese online game firm could be headed for de-listing, after shares of China Mobile Games (Nasdaq: CMGE) tanked on reports of a major bribery scandal. China Mobile Games' woes are just the latest in a growing list for US-traded online game makers, which have earned the official title of "no respect" from Wall Street investors. Two of the sector's biggest players, Shanda Games (Nasdaq: GAME) and Giant Interactive (NYSE: GA), are in the process of privatizing, and I wouldn't be surprised to see a buyout offer emerge for China Mobile Games following this new scandal.

In fact, the new scandal probably isn't all that scandalous by Chinese standards, and reportedly involves allegations that China Mobile Games executives paid bribes to boost the company's business. Allegations of false accounting and other financial shenanigans would have been much more damaging, exposing bigger fundamental problems with the company. But bribery allegations can be more easily "rectified" with a few staff adjustments, and shouldn't have nearly as huge an impact on the company's finances.

The source of all the latest news appears to be a research report issued by Japan's Nomura, though I couldn't find an actual copy of that report. According to other media, 9 executives, including the company's president, have been suspended from China Mobile Games due in the scandal. (English article; Chinese article) The company's CEO Xiao Jian wasn't one of the 9, and is temporarily taking over many of the roles previously performed by President Ying Shuling.

China Mobile Games shares lost as much as 25 percent of their value in the trading session after the news came out, and closed down 22 percent. Even at their current levels, the company still has a fairly large market value of nearly $500 million. That could make it a nice, mid-sized takeover target for an opportunistic buyer looking to capitalize on the sell-off.

China Mobile Games is a relatively strong online game company, but like many of its peers it has gotten very little respect from Wall Street investors since its unusual method of listing by introduction in 2012. The company's shares initially traded at around $15, and then rallied sharply earlier this year to as much as $40 on a wave of bullishness about Chinese Internet stocks. This latest sell-off has brought them back to their levels right after the IPO, with the stock last trading at $14.63.

China Mobile Games' woes are just the latest for a Chinese gaming company on Wall Street. Shanda and Giant both announced their privatization plans over the past year due to undervaluation, and reports earlier this week said Giant was weighing a re-listing in Hong Kong closer to its home market (previous post). Last month, mobile games maker Chukong Technology was also forced to yank its plans for a New York IPO after making several preliminary filings (previous post).

The problem with all of these companies is that few can post consistent strong growth due to their heavy dependence on individual games for their success. Thus a company that posts huge growth this year due to popularity of a new game title could see that growth evaporate 2 years later if it fails to find a replacement. The only companies with large enough scale to avoid that fate so far have been industry leaders Tencent (HKEx: 700) (OTCPK:TCEHY) and NetEase (Nasdaq: NTES).

So, what exactly is ahead for China Online Games? The company's shares are unlikely to fall much further, though resolving the scandal and settling a flood of shareholder lawsuits will take time and could disrupt regular business for the next 6 months. In the meantime, there's a reasonably good chance someone might launch a buy-out for the company, meaning there could be some upside for the stock.

Bottom line: China Mobile Games is unlikely to suffer a long-term impact from a new bribery scandal, and its shares could have some upside if a buyout offer emerges.

Disclosure: None.