Beijing time, March 25 evening news, China Handicraft Entertainment Group (Nasdaq:CMGE), released its financial report for the fourth quarter and full year of fiscal year 2012, which ended on December 31st. For the fourth fiscal quarter, the company reported revenue of RMB 28.9 million ($4.6 million), compared to RMB 43.6 million in the third fiscal quarter and RMB 60 million in the same period a year earlier. Net loss was CNY58.3 million ($9.4 million), compared with net profit of CNY1.6 million in the third fiscal quarter and net profit of CNY108.4 million in the same period a year earlier.
Hexun.com's stock channel linked up with Mr. Xiao Jian, CEO of China Mobile Games, to explain the current situation and future development of China's mobile game industry, as well as China Mobile Games' just-released fourth-quarter earnings report.
HeXun Stock: Is the main reason for the increase in the loss of China Handicraft in the fourth quarter due to the transition period of the company's operation?
Shaw Jian: China's hand tour in the fourth quarter occurred for the first time loss, the main reason is that the smart phone rapid, due to the company's 60% of the revenue from the function machine, the function machine business by the impact of the market changes in the decline.
On the one hand, the cell phone design company we acquired at that time, as we were dealing with the process of transitioning from feature phone to smartphone business in 2012, the performance did not meet the expectations promised at that time, so financially we made a one-time impairment arrangement of RMB 44.4 million; secondly, we made a one-time expenditure of about RMB 17 million in listing expenses for our listing in 2012; and thirdly, we were dealing with a critical period of transformation in 2012, and in order to encourage the team, we issued a certain amount of options, and the issuance of options was financially charged to a certain amount of issuance cost expenses, which was about RMB14 million here. So if you subtract these one-time expenses and impairments, we actually had a profit of more than RMB 60 million for the whole year of 2012 for China Handicraft.
But it's undeniable that since the second half of 2012, China Handicraft has been facing a full-scale transition from feature-phone games to smartphone games, so the second half of 2012 can be said to be a period of constant foundation building and accumulation for China Handicraft's smartphone games, which required the investment of more money and resources, and was the main reason for the decline in performance in the fourth quarter of 2012. However, it can be said that the performance of China's handheld games in the fourth quarter of 2012 has been the lowest point in history. With the meticulous deployment and strong implementation of the strategic layout in 2012, the first quarter of 2013 has begun to show rapid growth in the smartphone game business! 2013 will also be the key year for China's handheld game to resume rapid growth and take off again!
Hutchinson: What is the layout of China Handy's game business at this stage?
Shaw Jian: In 2012, China's smartphone ownership reached 360 million, with a growth rate of 80.0%, the company accelerated the layout of the smartphone field, focusing on smartphone handheld game research and development and operation. In terms of independent research and development, we mainly focus on three major types of games: the first category, chess and card games, China Handy has developed the "Happy" chess and card series, including "Happy Landlord", "Happy Frying Flower", "Happy Mahjong", "Happy Two-player Mahjong", "Happy Cow and Cow" and so on, and some of the chess and card games have been launched to the market and have achieved very good results. Some of the games have been introduced to the market one after another and have gained a good reputation among the users. Just two months after the launch of the "Happy" series of board games, the recharge of the same month has exceeded 5 million dollars and is still growing at a high speed. The main reason for such rapid growth is that board games are really on the smart phone, our deep understanding of the board users and the quality of the products, and of course, the most important aspect is that we have a large number of our own users and effective means of promotion.
The second major category, RPG online games, we developed the immortal class large-scale RPG online game "Descending Demon Myth" has begun closed beta testing on March 23, 2013, and is expected to be formally charged in the second half of April for public testing. Demonfall Myth" is an MMOARPG game masterpiece jointly developed by China Handy Games and Guangzhou Fiyin, a leading page game company, aiming at a monthly income of ten million dollars; "Valley of Battle", a real-time RPG online game with a background of Western magical myths, will be officially opened for closed beta testing on April 8, 2013, and is expected to be formally charged for the public beta testing in the beginning or middle of May. Battle Valley" is researched and developed by China Handy Games for one and a half years, and we believe that "Battle Valley" will be the first product of China Handy Games that enters into the 10 million level of monthly income; in addition, our self-developed large-scale 3D immortal MMOARPG "Immortal Magic Road" will soon be on-line in closed beta testing in mid-April, and it is expected that it will be formally opened for open beta testing at the end of May. From the current point of view, May is the time point for our large-scale RPG online games to be launched intensively. In addition, we have previously developed a social development online game "Little Aquarium", this game will also be in the previous market data testing and user feedback on the basis of the revamp, and will be formally launched at the end of May in the IOS and ANDROID synchronization of the new version, I believe that the revamped "Little Aquarium" will attract a lot of casual development players; we are also developing the above the ancient legends for the essence of the turn-based RPG online game "The Legend", which is a turn-based RPG online game, will be launched in the middle of April. At the same time, we are also developing the turn-based RPG online game "Fairy Wind" with the essence of the ancient legends, the turn-based RPG online game "Rip Bomb" with the background of the Stone Age, the 3D music and dance experience online game "Dazzle Dance Pie" and the horizontal version of the fighting online game "Records of War of Three Kingdoms" (tentative name), and so on. All of these online games will be launched within the second and third quarters of 2013.
The third category, classic, exquisite and innovative single-player game products, we are developing 4 game products of this type, which will be officially launched at the end of May. These 4 games are all classics in the classic, the quality is absolutely up into, but also with very innovative, exciting interactive gameplay, we are very confident that will set off a new wave of single-player game boom.
Hexun stock: China's hand tour will spend gravity in the future on the development and operation of smart phone network game, the future expansion in this area, the company in the development of the product and channel construction and operation strategy on what to do. How do you see the prospects of the domestic cell phone online game market?
Xiao Jian: The company has established a complete set of industry operation and service system, and established "online + pre-installed + offline" three-dimensional independent traffic channels. The company has established a complete set of industry operation and service system, and has built up a three-dimensional independent traffic channel of "online + pre-installed + offline". We have a game promotion advertisement alliance network covering more than 150 million users, with more than 30 million monthly active users and 200 million times of daily advertisement display. We have a professional CPT advertising team, constantly selecting and optimizing the CPT advertising purchase and placement in major app stores, we have reached a full year of cooperation with some app stores, the future competition for user resources will become more heated, so we operate the user traffic in a fine manner, in advance to set up a good "own traffic turf" of the game. We have a lot of traffic channels. Own traffic channel two, terminal pre-installation channel: we have a strong terminal pre-installation business team, and have a wealth of terminal pre-installation cooperation experience and successful cases, we through the major brands of cell phone manufacturers and programmers to pre-install our China Handicap Center and self-developed and sole generation of the game products, our partners include such first-tier brands as coolpad, zte, tianyu, jinli, lenovo, waveguide, fanzhuo, etc. and programmers, we expect that in 2013, we will be the most popular brand in the world. Our partners include first-tier brands and solution providers such as Coolpad, ZTE, Jinli, Lenovo, Poguide, Fanzhuo, etc. We expect that the pre-installed quantity of terminals in the whole year of 2013 will reach 60 million. In addition, including the next as a strategic investor in China's handheld game, the second largest shareholder of Taiwan MediaTek (MTK) will further help China's handheld game directly pre-installed in China's handheld game center, and recommend our products to their customers, this aspect of the work will also be formally launched within the second quarter; Owned traffic channels, cell phone terminal stores channel: China's handheld game has begun to lay out in the beginning of the year the layout of the terminal stores channel, the offline, we through the development of a set of software installation and installation of the software, the cell phone terminal channels. Through the development of a set of software installation and billing management system, we have opened up 1,000 cell phone terminal store games and software promotion cooperation, through this system, the terminal store salesman can be very direct and convenient to the many game products and software products in the sale of cell phones to help users install in cell phones, we plan to develop close to 10,000 cell phone terminal store cooperation in 2013, by 2014, the offline channel will be for the first time. In 2014, offline channels will contribute more than 40 million cell phone installations to China Handy Games. The hard and tiring work of offline terminal stores is not something that big enterprises want to do or small enterprises can't do, but China Handy Games must do it well! China's hand game has always been in the channel has a strong foundation and first-mover advantage, has its own flow of this piece of strategic "turf", for China's hand game for the future development of the vital, so we spared no effort!
Hexun stock: China's hand tour masterpiece "war valley", "the myth of the descending devil" and other heavy cell phone online games will soon be on the line, so for the heavy online games, Mr. Xiao think the market outlook?
Xiao Jian: must be the future of cell phone games focus on revenue game type, the performance of cell phone terminals, WIFI and 3G popularity, as well as professional handheld game company will be for the cell phone side of the performance, operation, as well as the network characteristics of the game focus on the optimization, so the game experience can be done very great! 2013 before June there will be a large number of high-quality heavy online games to the market, I I believe that the second half of 2013 will be the time for the outbreak of heavy mobile online games.
Hexun Stock: China Handy Games has established a strong operation and promotion team for third-party games. Can you give investors a brief description of this specialized area, how the company realizes profitability in this area, and how it creates long-term value for shareholders?
Xiao Jian: With regard to the third-party game intermodal business, first of all, based on the company has established a complete set of industry operation and service system as the core, constructed "online + pre-installed + offline" three-dimensional independent traffic channel as the cornerstone, on the one hand, to promote our self-developed products, on the other hand, we have carefully selected some high-quality boutique products, and on the other hand, we have a lot of time for the promotion of our products. On the one hand, we promote our self-developed products, and on the other hand, we carefully select some high-quality boutique games for exclusive agency operation. In terms of selecting exclusive agency cooperation, although China Handy Games independently developed more than 15 mobile online games in 2013, we also clearly recognize that games are products with high requirements for creativity, consumer taste judgment, quality and online time window. Therefore, we will also exclusively distribute our products to other strong game operators to maximize our revenue and growth. At the same time, based on its huge own traffic and complete game operation system, China Mobile is also observing the market demand and changes, so as to quickly and accurately capture those products that meet the creativity, judgment of consumer tastes, quality, and launch time window, which are not yet developed by China Mobile. In 2013, we will select a few game products for exclusive agency, and invest enough resources and funds to work with our selected sole agency game partners to make the game well done and well operated, and to enjoy the big cake of the development of mobile games! The first game we operated solely on behalf of the Dragon War Three Kingdoms, the game's IOS version of the registered users has more than a million, the peak daily recharge has exceeded 70,000 yuan, and the Android version of the official public testing of today's external charges.
Hexun Stocks: How much does China Handy invest in R&D and how much in operation? Which one does the company prefer to invest in?
Xiao Jian: From the viewpoint of the strategic layout of China's hand tour, the independent research and development of the game still accounts for the main, but with the rapid expansion of our own traffic channels, and the rapid growth of our sole agency operation products, China's hand tour will account for half of the proportion of independent research and development and game intermodal transportation. This will enable China Handy Games to develop a bit more robustly. In addition, it is worth mentioning that our internal channels, R & D, intermodal business are independent teams and independent accounting, and channels and intermodal business are already making money, has left the period of burning money to build channels.
Hexun stock: we see from the Q4 earnings report, China's handheld game of cell phone program design this piece of the group's earnings contribution is very little, may I ask China's handheld game has not considered cutting this piece of performance business?
Shaw: In the era of feature phones, the cell phone design business did create good results for the company, but they are also facing the problem of transition between the declining feature phone market and the rapid development of smart phones, and I believe that they have the ability and confidence to make a good transition. But in the long run, the cell phone design business is not very relevant to our main business, so we will also spin off this business at the right time.
Hutchinson: In the era of feature phones, China's handheld game has a strong channel capability. So in the smartphone era, how will China Handy Games utilize this advantage? And how to do a good job of smartphone channel layout?
Shaw Jian: In the previous I have talked about this piece, the company focuses on the construction of its own traffic channel two.
Hexun stock: domestic mobile game makers, in the overseas market has a good profitability. For the overseas market, how will China's hand game deal with?
Shaw Jian: The globalized market of mobile games has begun to arrive. Like Kunlun Wanwei, in the overseas market have a very good revenue, China's hand game also see the opportunity of the overseas market, before did not start on the one hand because we are in the transition period of the smart phone, limited energy, and on the other hand did not think about how to do it but after a period of time of figuring out, we are in the overseas business has been a clear corresponding strategy, and the next step will be to quickly build our overseas game operation team, . . We will share the information about our overseas market, at the right time.
Hutchinson Stock: In 2012, China's handheld game comprehensive layout of the transformation of smartphone mobile games. So in 2013, will it be the year of China's handheld smartphone mobile game outbreak, and will China's handheld game have any better innovations to bring to the mobile game market in 2013?
Xiao Jian: The popularization of smart terminals has brought a good opportunity for the development of the cell phone game industry. 2012 saw a record high in China's smartphone sales, with the cumulative annual sales reaching 169 million units, a year-on-year increase of 130.7%. At the same time, the cumulative number of mobile game users in China reached 286 million, an increase of 62.5% over the previous year. With the continuous improvement and rapid popularization of smartphones, the emergence of various excellent mobile games has laid the foundation for the development of the market. 2013 will be the year of the outbreak of China's mobile game industry, with the emergence of a number of domestic handheld games with a surplus of more than 30 million dollars, which indicates that the domestic handheld game market has really begun to explode, no matter from the conditions of the market, the conditions of the user, the conditions of the technology and the conditions of the network, etc., have been available, and the mobile game will enter into the quantitative change of the market.
In 2013, China Handy Games will launch more than 15 smartphone online game products, China Handy Games began to layout the development and exclusive agency operation of the game products in 2012, we can foresee that the monthly income of ten million products are: "Happy" chess, "Battle Valley", "Demon Myths" and so on. In fact, our R&D and other games operated by our exclusive agent also have the potential to earn ten million dollars a month, and we will polish our products and operate them with all our heart! I believe China's handheld game has more excellent products will explode!