ZX Inc: Surging over 170% in 7 trading days, is this "crazy roller coaster" really not crazy?

ZX INC (09890), which has been included in the Hang Seng Index, seems to have stepped out of the shadow of a "76% daily plunge."

Recently, the Hang Seng Index announced the quarterly review results of the Hang Seng Index series as of December 31, 2023. ZX INC has been included in a total of 19 indices, including the Hang Seng Composite Index, and the related changes will take effect on March 4, 2024. As one of the benchmarks of the Hong Kong stock market, companies included in the Hang Seng Index are likely to attract significant attention, while those excluded may not.

Boosted by this news, from February 7 to February 19, in just 7 trading days, ZX INC has surged by over 171%. By the end of the 19th, its stock price had risen by over 24%, closing at HKD 41. Previously, on February 2, the company's roller-coaster trend of a sharp drop followed by a rapid rise had captured attention. Specifically, the stock experienced a "plunge" on that day, plummeting by 77% at one point, then quickly rebounding, ultimately closing down by 76% at HKD 16.66, almost wiping out all previous gains. On February 20, although the stock price of ZX INC showed a slight decline, the impact was relatively minor compared to the recent gains.

After a sharp drop followed by a gradual recovery and rise, could it be that the "crazy roller-coaster" of ZX INC is not so crazy after all?

A gaming operator surrounded by three major advantages

Undeniably, the mobile gaming industry still possesses great "vitality" and is a sector with rapid growth within the overall gaming industry.

According to Frost & Sullivan data, in terms of user spending, the Chinese mobile gaming market has grown rapidly from 158 billion yuan in 2018 to 240.2 billion yuan in 2022, with a compound annual growth rate of 11.0%. It is expected to reach 343 billion yuan by 2027, with a compound annual growth rate of 7.4%. At the same time, the percentage of the mobile gaming market in the overall Chinese gaming market has increased from 75.1% in 2018 to 83.3% in 2022, and is expected to further rise to 87.5% by 2027.

Moreover, driven by the increasing demand for cultural, recreational, and leisure activities, as well as the continuous innovation and development in the mobile gaming industry, the Chinese mobile gaming market is expected to continue expanding. In China, the vast majority of gaming players are mobile gamers. The total number of mobile gamers has increased from 593 million in 2018 to 654 million in 2022. The industry is full of vitality, which means ZX INC will also rise rapidly.

It is reported that ZX INC originated from Jiangxi's Greedy Play, is the second largest domestic mobile game product marketing and operation platform not developed in-house. It mainly operates the distribution of online games through two modes: self-operated and collaborative operation. The company was established in May 2015 and went public on the Hong Kong Stock Exchange on September 28, 2023. In terms of revenue, ZX INC is the fifth largest mobile game product distribution company in China, accounting for 3.5% of the total market share in 2022. In 2022, the four major participants in the Chinese mobile game market accounted for over 60% of the total market share.

Specifically, the company operates online game distribution business under the brand "Greedy Play Games," dedicated to marketing, operating, and developing game products for customers. The "Greedy Play Games" brand is well-known for maximizing the lifecycle of game products through precise marketing and deep operation to achieve long-term value, becoming a widely accepted online game distribution brand among Chinese players.

As of the first half of 2023, the company has operated over 330 game products, including popular premium games such as "Primitive Legend," "Ancient Cloud Legend," "Blade of Freedom," "Blood Strike," and "National Rivers and Lakes." The marketing and operation of game products have accumulated approximately 433 million registered users, a year-on-year increase of 21.6%.

In the gaming market, many game developers lack resources, expertise, and channels to support the marketing and operation of self-developed game products, making it difficult to obtain the marketing and monetization tools needed for the successful operation lifecycle of their developed game products. With its rich experience and capabilities in marketing, operation, and development, ZX INC's Greedy Play platform has accumulated a large user base, customers, and suppliers, and built a proprietary technology platform.

As of now, ZX INC has formed the following core advantages through its developed services, technological infrastructure, and accumulated professional knowledge in the field of online games:

Firstly, it has rich experience in precise marketing, deep operation, and brand development. Its deep operation capability effectively expands the monetization potential and lifecycle of game products. Secondly, it has a huge user base and has established long-term comprehensive cooperation relationships with game developers and major media platforms. Thirdly, its proprietary technology platform can capture and analyze different data, convert it into marketing activities targeting the target end-users, and help enhance the brand development capability of game product brand awareness and penetration rate.

In addition, the company's subsequent product reserves are also rich. As of April 2023, there are 70 reserved games in the pipeline, with an expected release of 30-50 games in 2023. Several games are expected to be launched from Q4 to next year's Q1, boosting steady growth in performance from 2023 to 2024. However, it is important to note that the surface halo is still just superficial, and the growth potential of ZX INC's core is perhaps the unspoken consideration for investors.

Three Unavoidable "Hidden Worries"

Indeed, while ZX INC has rapidly developed with the industry trend, there are actually three unavoidable major hidden worries within.

Firstly, there is performance pressure.

Zhitong App has learned that the company's business is mainly divided into three parts: interactive entertainment business, fast food business, and trendy toy business, with the interactive entertainment business dominated by the "Greedy Play Games" brand as the core business, accounting for 90% of its revenue. Since its listing, the company's stock price has mainly shown an upward trend, with its stock price rising by about 415% by January 31, 2024. Who would have thought that ZX INC's performance would come under pressure after going public.

According to the mid-term report, in the first half of 2023, the company achieved a revenue of 3.4 billion yuan, a year-on-year decrease of 25.04%; the gross profit margin was 67.5%, a year-on-year decrease of 7.3 percentage points; and the net profit attributable to shareholders was 276 million yuan, a year-on-year decrease of 18.49%.

In the first half of the year, although the registered users of ZX INC have increased significantly, the monthly active users have decreased by 7.2% year-on-year to 8.6782 million, and the monthly paying users have decreased by 40.3% year-on-year to 1.0548 million. Although the average monthly ARPPU reached 509.4 yuan in the first half of the year, a year-on-year increase of 21.5%, it is not enough to compensate for the decline in the number of monthly paying users. This has also become an important reason for the short-term pressure on the company's performance.

Secondly, there is a focus on marketing over research and development.

From the perspective of industry development trends, although the mobile gaming industry is still showing signs of growth, the market has actually shifted from "people looking for games" to "games looking for people," which has become an undeniable fact. This also means that with the explosive development of the gaming market and the massive outbreak of information on the mobile internet, the factors determining what games players play have become increasingly complex and variable, leading to further intensification of industry competition, requiring game publishers to have the ability to find where potential players are and accurately match with them.

However, ZX INC is questioned for its "focus on marketing over research and development" in this aspect, which may have a negative impact on the construction of its core competitive advantage.

According to financial data, from 2020 to 2022, ZX INC's sales and distribution expenses were 1.917 billion yuan, 3.851 billion yuan, and 5.622 billion yuan respectively, accounting for 66.7%, 67.1%, and 63.8% of total revenue. In the first half of 2023, the company's sales and distribution expenses were 1.953 billion yuan, accounting for 57.4% of revenue. This has led to market criticism of ZX INC being "focused on marketing over research and development." From 2020 to 2022, ZX INC's research and development costs decreased from 472 million yuan to 158 million yuan, with the proportion of total revenue also dropping significantly from 16.4% to only 2%. In the first half of 2023, the company's research and development costs were about 86.7 million yuan, accounting for 2.6% of revenue, showing a clear contrast with the high sales expenses. Finally, the diversified wings are not yet fully developed.

It is reported that ZX INC successfully incubated self-developed brands and content in new consumer scenarios in 2020 and 2021, including the fast food brand "Zha Zha Hui" and the trendy toy brand "Bro Kooli", continuously expanding its business boundaries and diversifying its "eating, drinking, playing, and entertainment" layout. However, at present, it seems that the scale of the company's diversified business has not yet fully matured.

Taking the fast food business as an example, the main brand incubated in this business is "Zha Zha Hui", established in 2020, while the trendy toy business "Bro Kooli" was launched in 2021. The new business started generating revenue in 2021, but by the first half of 2023, the revenue of the company's consumer goods business was only 127 million yuan, accounting for just 3.8%.

In summary, as a newly listed stock in the Hong Kong stock market, the previous doubling of ZX INC's stock price undoubtedly indicates that it is a relatively outstanding "new star" in the Hong Kong stock market. However, it is important to note that the sharp fluctuations in stock prices, erratic trading volumes, and the inevitable hidden concerns in its fundamentals also suggest that the investment risk is gradually increasing, and investors may need to proceed with caution.