07/16 2024 475
As everyone knows, the current market environment is not optimistic, and most companies are tightening their belts. However, the shareholders of 37 Interactive Entertainment seem to be free from such troubles.
In the first quarter of this year, 37 Interactive Entertainment distributed a cash dividend of RMB 2.10 per 10 shares to all shareholders, totaling RMB 460 million.
(Announcement on May 16, 2024: Announcement on the Implementation of Dividends for the First Quarter of 2024 of 37 Interactive Entertainment)
The dividend distribution in the first quarter of 37 Interactive Entertainment was not unexpected.
At the beginning of this year, 37 Interactive Entertainment announced its latest annual report dividend plan, planning to distribute dividends of RMB 820 million to all shareholders in 2023, and increasing the dividend frequency from once every six months to once every quarter.
This also made 37 Interactive Entertainment the first A-share listed company to propose a continuous quarterly dividend plan.
Specifically, 37 Interactive Entertainment's quarterly dividend plan will distribute dividends based on undistributed profits and current-period performance in the Q1, H1, and Q3 reporting periods of this year, with each period not exceeding RMB 500 million, for a total of not exceeding RMB 1.5 billion. If the maximum amount is actually distributed, along with the upcoming 2023 annual dividends, then the total dividend amount of 37 Interactive Entertainment in 2024 will reach RMB 2.32 billion, accounting for nearly 90% of its net profit in 2023.
Generally speaking, the dividend ratio of a listed company is usually within the range of 30%-60%, and the highest will not exceed 80%. Although since the State Council issued the new "National Nine Policies" in April to encourage dividend incentives, well-performing listed companies such as Dong'e Ejiao and Donggang Co., Ltd. have each launched dividend plans with dividend payout ratios exceeding 80%.
However, in the past two years, 37 Interactive Entertainment has been mired in the vortex of buying traffic, and its performance has been slowing down, with profits also declining continuously.
Because of this, many people have questioned whether 37 Interactive Entertainment's proposal for four dividend distributions in one year is an attempt to cash out quickly.
The biggest beneficiaries of 37 Interactive Entertainment's dividends are undoubtedly Li Weiwei, Zeng Kaitian, Hu Yuhang, Xu Zhigao, and other senior executives and supervisors. Financial report data shows that as of the end of 2023, Li Weiwei, Zeng Kaitian, Hu Yuhang, and Xu Zhigao held 322 million, 245 million, 202 million, and 36 million shares, respectively, totaling 805 million shares. The total share capital of 37 Interactive Entertainment is 2.2 billion shares, which means that these four senior executives and supervisors hold 36.6% of the shares.
If dividends are distributed according to the maximum standard, these four senior executives and supervisors can receive RMB 850 million in dividends each year.
It is worth mentioning that on June 27, 2023, Li Weiwei and Zeng Kaitian were investigated for suspected violations of information disclosure laws and regulations, and no conclusion has been reached yet.
1. Rising to the third-largest domestic game company through buying traffic?
According to GameDaily reports and AppGrowing statistics, in May 2024, 101 mobile game apps and 27 casual games bought traffic, with an estimated investment exceeding RMB 10 million. Among all Chinese game companies buying traffic, 37 Interactive Entertainment invested the most in game advertising.
In other words, in terms of game advertising investment, 37 Interactive Entertainment ranks first in China.
Buying traffic is a game promotion method that has emerged in recent years, where game companies create game promotion content in the form of images or videos and place them on social media, news feeds, short video platforms, etc., attracting users to click on the ads and download the games. A certain proportion of these users will subsequently purchase in-game items.
Looking back at the development history of 37 Interactive Entertainment, it has always been closely related to buying traffic and is even known as a "big spender on buying traffic".
Founded in 2011, 37 Interactive Entertainment focused on web games in its early years and became the second-largest web game platform after Tencent in 2013.
At that time, the channels for buying traffic for web games were mainly concentrated on various computer software and websites.
In 2015, 37 Interactive Entertainment invited Hong Kong star Lam Tze-chung to endorse "Legend of Conquest", which was once considered a booster for performance growth.
With the last sentiments of Hong Kong stars, Lam Tze-chung's brainwashing lines, and ultra-intensive advertising, this innovative combination of buying traffic allowed "Legend of Conquest" to generate over RMB 300 million in revenue within 80 days. This not only triggered a wave of Hong Kong stars densely endorsing web games but also became a legend in the era of web games.
After the mobile game era arrived, 37 Interactive Entertainment promptly shifted to the new racetrack. After launching its self-developed mobile game "Eternal Crusade", 37 Interactive Entertainment began promoting it on various Android channels. To maximize the promotion effect, 37 Interactive Entertainment claimed that there was no upper limit on its monthly promotion budget and covered mainstream channels such as Yingyongbao, OPPO, Huawei, Xiaomi, etc., implementing a "channel + buying traffic" model.
The vigorous promotion of 37 Interactive Entertainment was indeed very effective, with revenue easily exceeding RMB 100 million in the first month, exceeding RMB 2.1 billion in 10 months, and reaching a peak daily revenue of RMB 62 million. It also became one of the first game companies to successfully transition from web games to mobile games.
In 2018, when short video platforms such as Douyin emerged, 37 Interactive Entertainment was quick to sense this trend and invested heavily in buying traffic for its MMOARPG (Legend/Miracle-type) games.
Subsequently, 37 Interactive Entertainment also launched the "Quantum" AI system, which can accurately analyze and depict target user personas through algorithms and automatically place ads.
After buying traffic and vigorously promoting, 37 Interactive Entertainment can obtain game users with a higher willingness to pay after downloading at a lower cost.
Driven by "buying traffic", 37 Interactive Entertainment launched a series of popular games such as "Soul Land" and "One Knife Online", making it the third-largest game giant in China, after Tencent and NetEase.
2. Struggling with buying traffic, spending nearly RMB 10 billion a year
As 37 Interactive Entertainment tasted the sweetness of "buying traffic", its investment in "buying traffic" continued to increase.
According to statistics from the mobile marketing data platform APP Growing, 37 Interactive Entertainment topped the list in July 2019, becoming the number one game advertiser in China.
At the same time, 37 Interactive Entertainment's marketing expenses have continued to rise.
Financial reports show that from 2018 to 2023, 37 Interactive Entertainment's sales expenses were RMB 3.347 billion, RMB 7.737 billion, RMB 8.213 billion, RMB 9.125 billion, RMB 8.733 billion, and RMB 9.091 billion, respectively, accounting for 43.85%, 58.49%, 57.04%, 56.27%, 53.23%, and 54.9% of revenue, respectively.
At the same time, most of these sales expenses were spent on "internet traffic fees", i.e., "buying traffic".
It is worth mentioning that 37 Interactive Entertainment's marketing expenses, both in terms of amount and proportion, far exceed those of leading A-share game companies. The median proportion of sales expenses to revenue for other peers is only about 25%, but 37 Interactive Entertainment's proportion is above 50%.
In the era of wild growth in the game industry, 37 Interactive Entertainment's high marketing expenses helped it carve out a certain market share. However, as the game industry enters the stock era, relying solely on "buying traffic" has made it difficult to achieve substantial performance improvements and may even lead to backlashes.
According to DataEye estimates, although the cost of buying traffic has continued to soar, 37 Interactive Entertainment's marketing efficiency has declined year by year. In 2017, the marketing efficiency of 37 Interactive Entertainment was 3.5, but by 2021, it had dropped to 1.85.
This means that although 37 Interactive Entertainment's investment in buying traffic is still substantial, the returns are decreasing.
Financial report data shows that in 2023, 37 Interactive Entertainment's revenue was approximately RMB 16.547 billion, an increase of 0.86% compared to the same period last year (adjusted); net profit attributable to shareholders of listed companies was approximately RMB 2.659 billion, a decrease of 10.01% compared to the same period last year (adjusted).
In addition to declining profits, the influence of 37 Interactive Entertainment's games is also increasingly prominent.
Although 37 Interactive Entertainment is considered a leader among A-share game companies, it is actually difficult for many gamers to name any of its blockbuster games, and its games have even been criticized by players for being seriously homogenized and roughly produced.
What's more, 37 Interactive Entertainment has also been continuously embroiled in infringement disputes.
According to "Tianyancha" information, miHoYo accused 37 Interactive Entertainment, Huohuang Shenghuo Company, and Piaoyang Company of unauthorized use of the image of the character "Cang Xuan" from the game "Honkai Impact 3rd" in a jointly released Douyin advertisement. Clicking on the advertisement showed the introduction page of the mobile game "Blade of the Nine Realms" and guided users to download and install the game. miHoYo believed that the above actions infringed upon its copyright and constituted unfair competition. Therefore, this case involved copyright infringement and unfair competition disputes.
In March 2024, after a public trial, the court sentenced the three defendants to compensate miHoYo with RMB 30,000.
This is not the first time that 37 Interactive Entertainment has lost a lawsuit to miHoYo.
In August 2022, miHoYo accused Guangzhou Huoshanhu Information Technology Co., Ltd., a wholly-owned subsidiary of 37 Interactive Entertainment, of unauthorized tampering with and using images from the game "Genshin Impact: Knights of Favonius", infringing upon its copyright. In the first-instance judgment, miHoYo was awarded RMB 30,000.
Once, "buying traffic" made 37 Interactive Entertainment the top 3 game company in China, but now, although 37 Interactive Entertainment is still the company with the largest investment in buying traffic in the domestic game industry, both its profits and reputation leave much to be desired.
3. Generous with dividends, but stingy with R&D investment?
Ultimately, although 37 Interactive Entertainment has high marketing investments, its R&D expenses account for a relatively low proportion, and the overall competitiveness of its game projects is far inferior to that of its competitors.
Financial report data shows that from 2021 to 2023, 37 Interactive Entertainment's R&D expenses were RMB 1.25 billion, RMB 905 million, and RMB 714 million, respectively, with R&D expense ratios of 7.7%, 5.5%, and 4.3%, respectively.
Not only have R&D expenses decreased year by year, but the proportion of R&D expense ratios has also been decreasing, even falling below 5%, forming a sharp contrast with the high sales expense ratio of 50%.
In contrast, competitors such as Tencent, NetEase, and miHoYo have significantly stronger R&D capabilities. Tencent has phenomenal mobile games such as "Honor of Kings" and "Game for Peace"; while NetEase and miHoYo each have flagship mobile games such as "Onmyoji" and "Genshin Impact", with a loyal fan base.
Previously, game projects such as "Soul Land: Soul Master Duel", "Seeking the Dao of the Ten Thousand", and "Mortal Cultivation Legend: Human Realm" under 37 Interactive Entertainment belonged to IP games and attracted many players through "buying traffic" promotion.
However, with the end of the three-year pandemic era, players' stickiness to games is declining, and even with increased traffic purchases, the lack of sufficient attractiveness in the games themselves still makes it difficult to retain players.
Therefore, Chuangu Research and Analysis stated that although 37 Interactive Entertainment is a leading company in the game industry, compared with competitors such as Tencent, NetEase, and miHoYo, it has obvious shortcomings in game development. Only by reducing its reliance on traffic promotion and improving its R&D capabilities can it reverse the situation.
At the same time, the domestic game industry's internal competition is becoming increasingly fierce.
According to Newzoo's forecast, the game industry's revenue reached USD 184 billion in 2023, with a year-on-year growth of only 0.6%. In addition, according to data from the Game Publishing Committee, in 2023, the actual sales revenue of China's self-developed games in overseas markets was USD 16.366 billion, a year-on-year decrease of 5.65%, marking the second consecutive year of decline.
This means that the overall growth of traffic in the game industry is becoming increasingly scarce, and stock competition is becoming more brutal.
Under these circumstances, many manufacturers are seeking new growth paths and turning their attention to the short video market.
37 Interactive Entertainment plans to introduce AI into game production and operation stages, which can reduce the cost of human development and also achieve the integration of short videos and games.
However, for now, 37 Interactive Entertainment is still in the initial stages of experimenting with short videos and has not produced any blockbuster projects.
Nowadays, the competition among game manufacturers is becoming increasingly fierce. If 37 Interactive Entertainment cannot bring high-quality game projects to occupy the market and achieve a perfect transformation, whether it can come out on top in this marathon is really uncertain.