The9 Limited (NASDAQ:NCTY) (“The9”), a Chinese company that has mainly in the business of online gaming since its inception, has taken bode steps into blockchain business this year. In January of this year, The company signed a partnership agreement with Gingkoo Technology Company Limited. ("Gingkoo Technology") to provide blockchain technology product development services and offshore offering, investing and financing services. Three months later, the company established a subsidiary to strengthen its blockchain consulting service business. If these two events served as precursors of the The9’s blockchain ambition, the next steps that the company announced this month showed that the company is very serious about making a big splash and becoming a major force in the blockchain world. In this article, we’ll examine the three announcements that the company made last week one by one and share our thoughts regarding each of them.
News #1: The9 is going to swap equities with Leading Choice Holdings Limited.
On September 3, 2018, The9 announced that it would swap equities with Leading Choice Holdings Limited (“Leading Choice”). Leading Choice is a Hong Kong based company mainly providing cryptocurrency mining service. Its EasyHashing website is a very well-known and popular website in the cryptocurrency industry in greater China region.
Leading Choice is viewed a rising star in the IT industry in the region. Its primary business – providing hardware and services for cryptocurrency mining - is a real cash cow. Over the next couple decades, cryptocurrency mining will continue to be highly profitable since blockchain will likely stay hot for a fairly long period of time. If Leading Choice can at some point cooperate with Alibaba (NYSE:BABA), the leading cloud service provider in China, and/or significantly lower the costs of its operations by building server farms for cryptocurrency mining in areas with low temperatures, cheap land, and low power cost in China (such as in Guizhou province), the company’s growth rate and profitability will be raised to an even higher level.
For Leading Choice, the most importantly task now is to expand its scale rapidly to gain as much market share in the industry as possible before the industry matures. After swapping equity with The9, Leading Choice now has direct access to the capital market in the U.S. It can now issue debt or equity in the biggest capital market for tech companies to quickly expand its scale of operation. Thus, in our view this transaction is really a win-win for both companies. The9 obtained a huge, profitable, and safe long-term revenue stream while Leading Choice got access to a big capital market as well as a huge distribution network and a big customer base that The9 has accumulated in the gaming industry over the past two decades.
News #2: The9 Limited is going to swap equities with Plutux Exchange.
On September 5, two days after disclosing the deal with Leading Choice, The9 announced that it was going to swap equities with Plutux Limited (“Plutux”). Plutux has many top blockchain technologists and esteemed business/management experts in the lists of its employees and advisors. The company is developing a global exchange scheduled to go online this fall. The exchange will allow cryptocurrency trading in a mobile centric environment. The company makes profits by charging commissions from cryptocurrency trades and by helping customers make ICOs. It also may lend money to customers to give them leverage in purchasing cryptocurrencies. In other words, its business model is pretty similar to that of a stock broker plus investment bank such as E-Trade, except that things traded on the exchange are cryptocurrencies, not stocks. Similar to Leading Choice’s business, Plutux’s business likely will be stably profitable and expand at a fast speed over the next several years..
After see The9’s new partnerships, we have a couple quick thoughts.
First of all, we feel that odds is high that The9 will make strategic partnerships with a cloud service provider in the near future. Although Leading Choice’s products and technologies are pretty strong now, its crytocurrency mining service will become even more attractive if it can establish a strategic partnership with Alibaba, Tencent (OTC: TCEHY), or Baidu (NASDAQ: BIDU) to provide reliable cloud service for cryptocurrency mining globally. These three Internet giants are facing some headwinds in their primary businesses and have seen their stocks losing big grounds this year. All of them desperately need to find new sources for growth. A partnership between The9 and any of the three will benefit both sides of the deal tremendously. Because The9 and the three giants are all in the Internet industry in China, they are quite familiar with one another’s culture and management team. Thus, the integration of The9’s business operations and computer systems with that of Alibaba, Tencent, or Baidu will be relatively easy, and the synergies of two companies can quickly manifest and materialize.
Secondly, The9 may be developing games that utilize blockchain technologies or even creating a blockchain platform for developing and servicing games. We believe that deep in the founders and executives’ hearts, they still want to revive the company’s gaming business because The9 was born as a gaming company. The company still has a well-established talent base and education network for game development. Even with its gaming business slumping, The9 still sponsors ChinaJoy event this year. Because blockchain gaming is such a hot new business right now, it is natural for The9 to step into this business since it now has expertise and capabilities in both gaming and blockchain.
News #3: CEO Mr. Zhu will personally purchase $3 million worth of the company’s shares.
On September 4, between the announcements of the aforementioned two equity swaps, Mr. Zhu disclosed that he would purchase $3 million worth of The9’s ADR shares. As far as we can see in records, Mr. Zhu has never been so excited about some business deals before. His excitement is easily understood. After losing the right of proprietary distribution for blockbuster game World of Warcraft ten years ago, this is the first time Mr. Zhu has got some securely profitable and fast growing businesses. One extra advantage of these two businesses is that neither will be affected by the trade war between the U.S. and China because the value of cryptocurrency is not tied to one currency and services of cryptocurrency and blockchain are not confined within the boundary of any single country. Therefore, despite the ongoing trade war between the U.S. and China, The9’s financial prospectus is almost completely immune to this macro-economic event.
Due to The9’s extremely bright business outlook after making these two deals, it is easy to see why Mr. Zhu is so eager to accumulate additional shares of the company. Mr. Zhu’s urge to accumulate additional shares may be amplified by the company’s miniature market capital and the fact that the company’s ADR is now sitting close to its historical low and less than 1/100th of its historical high. With a market capital of less than $40 million, any tech giants can launch a hostile takeover of the company with a blink of eyes. $3 million may be a serious amount for Mr. Zhu, but even $500 million is a piece of cake for Microsoft, Google, Amazon, Alibaba, Tencent, Baidu, or Netease. Mr. Zhu probably cannot resist a hostile takeover from any of these companies, but he can at least enlarge his capital gain in a case of takeover by holding more shares on hand.
For investors like us who are most interested in small caps, the case for investing in The9 looks very compelling right now. Although there are always risks for investing in small companies or companies pursuing new technologies, in our opinion for The9 the odds heavily favors longs right now.
Disclosure: I am/we are long NCTY.
Additional disclosure: Disclaimer: The opinions of the author are not recommendations to buy or sell any security. Please remember to do your own research prior to making any investment decisions, as well as knowing your own unique goals and tolerance for risk.