"Blue Whale News, August 21 (Reporters Zhang Yandi, Shao Yuting) - At 10 am on August 20, the first domestic 3A game masterpiece, "Black Myth: Wukong", was officially launched. Within an hour of its release, the number of concurrent players quickly surpassed one million, making it akin to the "Spring Festival Gala" of the gaming world. As of 8 pm, according to national game bestseller statistics, "Black Myth: Wukong" had sold over 4.5 million copies across all platforms, with total sales exceeding 1.5 billion yuan. The numbers continue to grow.

This was not only a gaming feast but also a capital feast. Feng Ji, the Libra man who challenged the gaming industry 17 years ago with the question "Who Murdered Our Games?", has undoubtedly achieved unprecedented success, "embarking on the journey to fetch the scriptures and reaching Lingshan (a sacred mountain in Chinese mythology)." After a decade of entrepreneurship, Feng Ji and Game Science, the company he leads, have risen and fallen with the gaming industry. Star shareholder Hero Entertainment and former employer Tencent have successively entered the picture, with Huayi Brothers' share price surging 70% within five trading days due to "Black Myth: Wukong", weaving a complex web of relationships. Amid this capital feast, Hero Entertainment, in the midst of equity transfers, appears somewhat weary.

Reaching Lingshan: Game Science Creates the Black Myth

The unprecedented popularity of "Black Myth: Wukong" has brought to light its developer, Game Science (affiliated with Shenzhen Youke Interactive Technology Co., Ltd., hereinafter referred to as "Game Science"). This company, founded in June 2014, has a founding team entirely composed of former Tencent employees.

Feng Ji, Chairman and General Manager of Game Science, is an avid World of Warcraft player from the 1980s generation. In 2008, he joined Tencent Games and served as the lead planner for the PC online game Battle of the Gods, which shared a similar Western Journey theme but ended on a disappointing note despite a promising start.

Game Science was founded in June 2014, amidst the booming gaming industry when online games were on the rise and hot money poured into the sector. The concept of "game-film synergy" was stimulating the capital market.

That year, Zhongji Holding announced plans to acquire casual social game developer Dian Dian Interactive for over 6 billion yuan, despite Zhongji's market value being only 4.2 billion yuan at the time. This was the largest M&A deal in the gaming industry that year, although it ultimately fell through, showcasing the capital frenzy. Similarly, Shiji Huatong announced plans to acquire the full equity of Tianyou Software and 7ku Network for 1.8 billion yuan, while Xinguodu put forward an 840 million yuan acquisition plan targeting game company Shenzhen Fantacy. Buyers were eagerly pursuing deals in the gaming circle that year.

Game Science was in a favorable position, undoubtedly giving it some confidence. On its official website, Game Science explains the origin of its name: "Before founding Game Science, we felt that the gaming industry in China was far from being a science (analogous to the communications or computer industries) but was instead filled with various success formulas derived from currently successful products in reverse. ... So, why Game Science? Because gaming, like other industries, is a rigorous discipline that requires 99% hard work and 1% inspiration, rather than a gambling business that follows trends and places bets."

Just one year after its establishment, Game Science launched the oriental fantasy-themed action card game "Hundred Generals March," distributed by NetEase Games. Feng Ji later reflected that it was a skin-changing game, reinforcing his belief in originality.

In 2017, "Red Tide" was launched, distributed by Hero Entertainment. This was the first domestic game publicly experienced by Apple CEO Tim Cook during his visit to China. The release of "Red Tide" brought Game Science onto the capital stage and onto another journey to fetch the scriptures.

Embarking on the Journey: Tencent's Gains and Hero Entertainment's Awkwardness

After releasing two products, in February 2018, Feng Ji wanted to develop a single-player game. The project codenamed "B1," short for "Black Myth One," is now known as "Black Myth: Wukong." The team consisted of only seven people at the time. Game Science made it its ultimate mission to establish an original game IP, which required funding.

In 2017, Hero Entertainment, which relied on game development and distribution to earn a net profit of 915 million yuan, was undoubtedly a wealthy investor. CEO Ying Shuling ambitiously sought to enter the capital market with Hero Entertainment. According to Tianyancha's financing information and Hero Entertainment's 2017 financial report, in May 2017, Hero Entertainment acquired a 20% stake in Game Science through its wholly-owned subsidiary Tianjin Hero Capital Technology Co., Ltd., at a cost of 60 million yuan, valuing Game Science at 300 million yuan. The investment income recognized under the equity method that year was 1.05 million yuan, indicating that Game Science was profitable at the time of Hero Entertainment's investment.

Until August 2020, when Game Science released the first 13-minute trailer for "Black Myth: Wukong," igniting the gaming community, the gaming landscape had changed. Game licenses were tightened, regulation was strengthened, and the market had shifted to a seller's market.

Starting in 2018, when Game Science announced its development of a single-player game, it failed to turn a profit for four consecutive years. However, from the trailer's release to the game's official launch, another three to four years of development were required, making capital injection crucial for Game Science. After the trailer's release, Game Science received investment from Tencent. Tianyancha shows that in March 2021, Tencent acquired a 5% stake in Game Science through its subsidiary Guangxi Tencent Venture Capital Co., Ltd., without disclosing the investment amount. Hero Entertainment's shareholding was diluted to 18.999992%. Meanwhile, Tencent made a "three no's" commitment: not to interfere with business decisions, not to seize project leadership, and not to seek distribution and operation, leaving the initiative to Game Science.

In 2021, Hero Entertainment suffered a significant loss of 1.5 billion yuan and struggled in the capital market. In 2019, Hero Entertainment's attempts to go public through backdoor listings with Hemei Group and Dongjing Electronics failed. After the failed listing with Dongjing Electronics, Hero Entertainment expressed regret but stated that they had tried their best. Two years later, in 2021, Hero Entertainment signed a listing coach agreement with Changjiang Securities to join the NEEQ Select Layer.

For Hero Entertainment, which was entering a downturn, its stake in the improving Game Science became an essential bargaining chip for fundraising.

According to Hero Entertainment's 2022 annual report, the company transferred its stake in Game Science for a consideration of 480 million yuan and had received the first transfer payment of 280 million yuan, completing the transaction. The agreement stipulated that the remaining 200 million yuan would be paid at a mutually agreed time (but not earlier than April 1, 2025), with contingent conditions attached to the recovery of the remaining transfer payment. However, as the company had not signed a written agreement regarding the payment timeline for the remaining 200 million yuan, there was significant uncertainty in its recovery. Therefore, the remaining 200 million yuan in transfer payments and investment income were not recognized in the current year. In other words, the transfer agreement had not been finalized, and Game Science remained a subsidiary-participating enterprise of Hero Entertainment.

From the perspective of long-term equity investment data, Hero Entertainment has liquidated its stake in Game Science, and Game Science is no longer listed under long-term equity investments in the 2023 annual report. Nevertheless, the two companies still have related transactions.

Although the remaining 200 million yuan in transfer payments has not been settled, Hero Entertainment has secured a 200 million yuan pledge loan through this equity relationship. According to Hero Entertainment's 2022 annual report, when applying for comprehensive credit from China Merchants Bank on behalf of its subsidiary, Hero Entertainment pledged its stake in Game Science as collateral. The asset status showed a book value of zero, accounting for 0% of total assets. Through equity pledge, China Merchants Bank provided a 200 million yuan loan with an interest rate of 3.6%, starting on April 28, 2022, and ending on April 24, 2025.

Tianyancha shows that the largest shareholder of Game Science is currently Feng Ji (holding 38.76%), followed by Shenzhen Youke Interactive Enterprise Management Center (limited partnership), whose limited partners (LPs) are Zheng Runzong (89.5% share) and Feng Ji (10.5% share), with Feng Ji serving as the general partner (GP). Additionally, Tencent's Guangxi Tencent Venture Capital Co., Ltd. holds a 5% stake, and Hero Entertainment's Tianjin Hero Capital Technology Co., Ltd. holds a 19% stake. There have been no changes in Game Science's shareholder structure, and Hero Entertainment has not disclosed the recovery of the remaining 200 million yuan in transfer payments in its 2023 annual report.

Wang Di, the chief lawyer of Beijing Zhongyou (Dongcheng District) Law Firm, analyzed for Blue Whale News that equity pledge is essentially one of the guarantee methods. Even if the remaining transfer payment is settled before the loan matures, the equity pledge remains valid. The existence of pledged equity prevents any transfer or change in business registration. After the loan matures, the borrower must repay the loan on time. If unable to repay in full and on time, the bank can resolve the loan issue through litigation and may choose to use the pledged equity to repay the loan through court auction.

As an unlisted gaming company, has Game Science's equity pledge financing been too easily obtained? China Merchants Bank has precedents in bank credit that integrates industry and finance. In July 2020, Huayi Brothers and long-time partner China Merchants Bank reached a strategic cooperation, with the bank planning to provide Huayi Brothers with a comprehensive credit line of up to 1.5 billion yuan for the development and production of film and television projects. This was reported to be the first comprehensive credit line based on a film slate in China, creating a new model for the integration of China's film and television industry with commercial banks. As early as 2006, the two parties had already collaborated innovatively on the film "Assembly," with China Merchants Bank providing the film industry's first unsecured loan as production funds.

Huayi Brothers and Hero Entertainment have deep ties. In 2015, Huayi Brothers subscribed to a 20.17% stake in Hero Entertainment for 1.9 billion yuan, with a premium of up to 795 times. In September 2021, Huayi Brothers sold a 15% stake in Hero Entertainment at a loss of 870 million yuan. Currently, Huayi Brothers holds a 5.17% stake in Hero Entertainment.

Huayi Brothers has also benefited from the popularity of "Black Myth: Wukong." As of the close on August 20, Huayi Brothers' share price closed at 2.94 yuan per share, with a 70.93% increase within five trading days, bringing its total market value back to 8.2 billion yuan. Notably, in the first quarter of this year, Tencent and its actual controller Wang Zhonglei, who had previously exited the top ten circulating shareholders, reappeared on the shareholder list, while Alibaba and Wang Zhongjun increased their holdings. If the shareholder list remains unchanged, the paper wealth of these shareholders has also increased in value.

Game Science's development philosophy is to impress developers themselves, and the launch of "Black Myth: Wukong" undoubtedly impressed gamers as well. This single-player game, still themed around the Journey to the West, is like Feng Ji's stunning counterattack against the decline of Battle of the Gods, which he led as the lead planner. On the "journey to fetch the scriptures," Game Science has ridden the rollercoaster of the gaming industry, with Hero Entertainment, Tencent, and Huayi Brothers all playing different roles in this dynamic narrative.