Tencent mulls acquisition of HK listed Fire Rock to bulk up South East Asia market

Tencent mulls acquisition of HK listed Fire Rock to bulk up South East Asia market

Recently, a game industry giant, Tencent (HKSE:700) has restarted its acquisition plan.

Seeking to expand its gaming business, Tencent has gone on an acquisition binge by snatching up Canadian game developer Klei Entertainment and Hong Kong listed company BAIOO Family Interactive Limited ("Baioo") (HKSE:2100). It is also rumored that Fire Rock Holdings Limited ("Fire Rock") (HKSE:1909), another Hong Kong listed company, is one of its acquisition targets.

On 25 January 2021, BAIOO announced that Tencent agreed to purchase a total of 326 million shares of the company. Upon completion of the acquisition, Tencent will own approximately 12% of the company's issued share capital and become the company's major shareholder. This news spurred the increase of the stock price of BAIOO by as high as 85%, and the total daily turnover reached HKD1.329 billion (approximately USD170 million). There was market news emerged earlier on that Tencent was negotiating with banks to obtain USD6 billion in financing, and that the loans obtained would be used to acquire potential game businesses. The expected acquisitions shall target on game companies in the United States or South Korea. In other words, the two above-mentioned acquisitions are just an acquisition prelude to more targeted purchase. The grand mergers and acquisition plan of Tencent is still underway, while large-scale mergers and acquisitions that worth billions of dollars are about to bring further impact to the market.

Data website Superdata announced that the 2020 game and interactive media market data report shows that in the midst of the COVID-19 Pandemic, the global game and interactive media market has grown by 12% in 2020 compared with the previous year, of which the total value of the video game market has reached as much as USD126.6 billion.

Among them, free games accounted for 78% of the total revenue of the video game market, reaching USD98.4 billion and it is expected to exceed the USD100 billion-mark next year. Among the free games, Tencent's "Honor of Kings" revenue has reached USD2.45 billion, which is the most profitable free game this year. Meanwhile, the popularity of "League of Legends", which has entered its 11th year of launch, has also persisted to grow. Its revenue has continued to grow to USD1.75 billion this year.

Obviously, Tencent wants to further seize the market through acquisitions. Some analysis pointed out that not only game developers, but Tencent also intends to supplement the group's blind spots in the South East Asia market and therefore, Fire Rock, a Hong Kong listed company, is one of its targets. Fire Rock initially started as a web game developer. Upon listing on the Hong Kong stock market around 5 years ago, it shifted to focus on its development on mobile device games. Some of its games include Royal Fish Catching, Kings & Legends and Sweeties Fighting and they all achieved excellent results in emerging markets such as Thailand and Vietnam.

On 18 January 2021, Fire Rock announced a profit alert. It is expected that the revenue for the year ending 2020 will increase by more than 60% when compared to 2019, and the profit will increase by more than 50%. The increase is attributable to the better overall market feedback, as compared to 2019, for game series commercially launched by Fire Rock during the period; and the commercial launch of numerous new games and proprietary overseas operations during 2020.

In the interim results of Fire Rock in 2020, Fire Rock has achieved remarkable growth figures, with a turnover of RMB285 million, an increase of 177.3% year-on-year; net profit of RMB 192 million, an increase of 213% year-on-year.

The revenue from the Asia-Pacific region (except China) increased 114 times y-o-y, mainly due to the Thai games Royal Tycoon, Royal Fish Catching, and Jungle Treasure achieved good results in Thailand. The performance of Fire Rock for the second half of the year is definitely worth looking forward to.

For its interim results in 2020, Fire Rock's net profit margin is 68.89%, return on net assets is 71.83%, and debt-to-asset ratio is 10.51%. All three indicators are the highest among Hong Kong listed peers. It is no wonder that some articles pointed out that Tencent is mulling acquisition of Fire Rock to bulk up its gaming business. Yet, notably and interestingly, the two companies have never explicitly denied the news.