After much anticipation, China's first AAA game masterpiece "Black Myth: Wukong" was finally launched on the 20th. The pre-sale revenue was close to 0.4 billion yuan in the previous month, directly breaking even. On the day of the game's launch, the number of concurrent users on the Steam platform exceeded one million, temporarily crashing the servers.

The power of the Monkey King has also stirred up a frenzy in the stock market. Many stocks, regardless of their actual value, experienced a sudden surge if they could be remotely associated with the 'cloud somersault'.

Among them, it includes Huayi Brothers, which indirectly holds 1% equity of the production company behind the scenes. Its stock price has surged by more than 80% in nearly 20 days. If you didn't understand, you might think it's a major shareholder.

In recent years, Huayi has been short of money, repeatedly selling assets to inject cash, and its main business has been lukewarm due to industry influences. The choice of private equity financing is a desperate attempt at luck. It's unexpected that after years of unsuccessful side businesses, they have now become successful due to the Monkey King.

01

Four years ago, a 13-minute real-time video demonstration of "Black Myth: Wukong" quickly went viral online, and also made Game Science, the company behind the game, stand out.

This game meets players' expectations for high-quality domestic AAA games in terms of production level, and its expression of the familiar Chinese mythological story background has also gained the attention of many international players.

Source: Game Science

Just before the game was launched, according to the latest weekly sales chart (August 6-13, 2024) released by Valve's Steam platform, "Black Myth: Wukong" ranked first in global weekly sales on Steam, dominating in 12 regions including the United States, Singapore, Thailand, Canada, Brazil, and Italy.

Goldman Sachs said that under the baseline scenario, "Black Myth: Wukong" sold over 12 million copies on Steam, generating over 3 billion RMB in revenue, while under an optimistic scenario, it could sell over 20 million copies, generating over 5 billion RMB in revenue, not including sales on WeGame and PlayStation platforms.

From the market's reaction, "Black Myth: Wukong" has become a highly anticipated phenomenon in the gaming industry. Although the direct economic benefits of "Black Myth: Wukong" mainly go to the developers, its positive impact on related concept stocks has already been manifested in the stock market.

The publisher of the game, Zhejiang Publishing Media, is only responsible for pre-game content review, publishing declarations, and other work, and has little to do with the game's profitability. However, it has benefited from the pre-sale frenzy, with the company's stock price rising nearly 20% in the past two weeks. Another collaborative partner, ZHISHANG Technology, has truly benefited and has achieved sales of over 0.02 million for their collaborative "Black Myth: Wukong" controller on JD.com. Due to shortages, they have already started the second wave of pre-sales, and the company's stock price has risen over 20% in six trading days.

Huayi Brothers, although not directly related, in June this year, the company's secretary to the board of directors stated in response to investor inquiries, the company holds 74,183,641 shares of Hero games with unrestricted sales, accounting for approximately 5.17% of the total share capital of Hero games.

According to Tianyancha, Hero games is the second largest joint-stock company of game science, holding 19% of the shares. Therefore, Huayi Brothers indirectly holds about 1% of the shares of Game Science, the developer of 'Black Myth: Wukong'.

Even with only 1%, it still rides the wave of popularity in the domestic game industry, so it's not surprising that the stock price is being highly sought after.

However, from 2015 to 2021, Huayi Brothers held a high proportion of shares in Hero Entertainment (now known as 'Hero games'), reaching 20%, making it the second largest shareholder of the company. In other words, the indirect shareholding could be close to 4%, and the promotion of Black Myth began in 2020.

Huayi Brothers could have waited for the jackpot with this ticket, so why did they choose to substantially reduce their holdings ahead of time?

There is a complex situation in the middle of this.

In May 2017, Game Science obtained a 60 million yuan investment from Hero Entertainment, with an estimated valuation close to 300 million yuan.

Hero Entertainment mainly develops mobile games. In June 2015, it successfully landed on the National Equities Exchange and Quotations after restructuring with Selects, wearing the halo of 'the first stock of the New Third Board mobile esports', but was delisted after only 7 years.

The decline in profitability is the main reason. After 2018, Hero Entertainment experienced a cliff-like decline. In 2021, Hero Entertainment's revenue was 1.6 billion yuan, but its non-GAAP net income reached a loss of 1.53 billion yuan, mainly due to a goodwill impairment of 1.22 billion yuan.

Huayi became a scapegoat in this situation. In 2015, Huayi invested 1.9 billion yuan to subscribe for a 20% stake in Hero Entertainment. According to the gambling agreement, from 2016 to 2018, the company's net income soared to 0.532 billion, 0.915 billion, and 0.728 billion yuan respectively, just fulfilling the performance commitment. However, as soon as the commitment period passed, its true colors were revealed. In 2019, Huayi devalued its investment in Hero Entertainment by 1.251 billion yuan.

From the perspective of how Hero Entertainment generates profits, this investment was bound to have some problems.

Huayi is not an expert in the gaming industry. In the previous years, the gaming industry suffered from a contraction in game licenses, making it difficult to produce hit games. Meanwhile, Hero Entertainment's attempts to go public through reverse mergers failed, and it could not obtain financial support. It could only continuously make fun of and fill the profits. As for Huayi's main business in the film and television industry, there is no need to mention it. The box office and company performance during the years of the pandemic are enough to illustrate the situation.

Both companies were starving in the industry downturn but could not seek a source of stability. This also explains why Huayi was no longer willing to wait for a black swan event. With the contraction of the industry and the poor performance of its main business, at that time, Hero Entertainment had become a burden that was thrown away without hesitation. Would they still wait for this game to become a success?

Finally, Huayi gave up on Hero Entertainment and chose to return to its main business. In September 2021, Huayi Brothers announced that it plans to transfer approximately 15% of Hero Entertainment's equity and 0.215 billion shares to a third party, obtaining a corresponding total price of 0.87 billion yuan. After the transaction is completed, its shareholding will decrease to about 5.17%.

The investment by Hero Entertainment has really paid off, and at one point it even relied on the shareholding of Game Science for survival.

According to the 2022 annual report of Hero Entertainment, the company once transferred the equity of Game Science for 0.48 billion yuan, and has received the first installment of 0.28 billion yuan for delivery, leaving 0.2 billion yuan to be paid, but no earlier than April 2025. This means that the equity transfer has not been completed yet, but in the long-term equity investment item in the 2023 annual report, Hero Entertainment has already unloaded Game Science.

The payment for the transfer has not been settled yet. However, in the second half of 2022, Hero Entertainment applied for a comprehensive credit of 0.5 billion yuan for a period of 3 years in the name of its Tianjin subsidiary from CM Bank, with the pledged symbol being the equity of Game Science, and finally received 0.2 billion yuan.

At that time, neither of the two gaming companies had much profit, and Hero Entertainment had even made substantial provisions for goodwill for two consecutive years. The gaming assets were also not ideal collateral. Despite these conditions, CM Bank was still willing to lend him the money. It will be another two years before this 3A blockbuster game is released, perhaps this is an important basis for their confidence.

A near 80% increase for a 1% shareholding may not be uncommon in the stock market, but the companies mentioned above have their own stories from the flourishing era of the gaming industry, to the struggles, and now the dawn of success.

02

Compared to the connection between Huayi Brothers and Black Myth, shareholders may be more familiar with the main business of Huayi, which is film and television production.

In 2014, Wang Zhongjun proposed the 'de-cinema' strategy, shifting focus to diversified investments, but the high premium from acquisitions turned the tide against Huayi. The main business also struggled, missing out on the opportunity to gain a significant share of the profits from many blockbusters. The revenue scale plummeted after 2018, with goodwill impairment leading to perennial negative profits and tight cash flow, resulting in a rush to sell off assets for cash.

For example, in July, Huayi sold Dongyang Meira, a company founded by well-known director Feng Xiaogang, to shareholder Ali Pictures for 0.35 billion yuan. In 2015, Huayi acquired this company for 1.05 billion yuan.

Since its peak in 2015, Huayi's stock price has fallen by 87% in market cap.

The high debt-to-assets ratio of the company means that a large amount of interest needs to be paid each year to repay creditors. However, the pre-production of the film and television industry requires capital investment. If Huayi wants to return to its main business, there is no other way but to choose private equity investment.

On August 10th, Huayi Brothers announced a new private equity investment plan, planning to issue no more than 0.777 billion shares to no more than 35 specific entities, with a total amount not exceeding 1.029 billion yuan. Approximately 0.72 billion yuan is planned to be used for film and television projects, and an additional 0.309 billion yuan is planned for supplementary working capital.

In the past four years, Huayi's path of private equity investment has been difficult, with seven revisions but no approval. And now, with tight financing conditions, Huayi has halved the amount of funds raised. Since going public, Huayi Brothers has raised a total of 14.848 billion yuan directly from the market, but has incurred a total loss of 7.962 billion yuan in the past six years, exhausting its accumulated earnings from going public.

After all, the stock price has dropped to this level. If it weren't for the success of the dark horse film, one would think that the market has little confidence in Huayi's turnaround, especially since the film and television industry has not performed as well this year as it did last year.

In the past five years, the film market has been recovering. The total box office of cinemas in the first half of 2024 reached 23.773 billion yuan, a 76% recovery compared to 2019. However, it did not continue the enthusiasm after the epidemic was lifted, with a 9.5% year-on-year decrease and a 9.27% decrease in the number of viewers.

On the supply side of films, the number of new releases in the first half of the year decreased by 6 compared to last year. The driving force of blockbuster films on box office is gradually weakening, with not many high-grossing films, and the height of high-grossing films is also insufficient.

In the first quarter, Huayi's losses continued to widen, with revenue of 95.215 million yuan, a 59.20% decrease year-on-year; the net loss attributable to the parent company was 18.56 million yuan, expanding by 76.76% year-on-year. For this reason, Huayi stated that the decrease in revenue from film and television projects was mainly responsible. Although Huayi has expanded its investment scope to include TV and short drama tracks, its control over top content has always been questioned.

In order to show sincerity to the market and shareholders, Huayi also disclosed a plan for future shareholder returns. The company's annual profit distribution in cash should not be less than 10% of the distributable profit for the year under the premise of complying with the profit distribution principle and meeting the conditions for cash dividends. The total profit distributed in cash by the company in the past three years shall not be less than 30% of the average distributable profit for the three years.

However, it's difficult to prove that Huayi has the ability to rise against the market with just a few words to "focus on its core business." Now, with an additional 1 billion yuan private placement, will anyone be willing to pay for it?