Summary of Key Points
Lingxi Huyu, a gaming company under Alibaba, has been acquired by Xincheng Capital, which is part of CITIC Capital. The deal has officially closed. Lingxi Huyu is considered a profitable asset, generating annual revenues of 3-4 billion yuan and profits of 1.5-2 billion yuan. However, as Alibaba shifts its strategy towards AI, it decided to divest from non-core gaming businesses. As a private equity firm, Xincheng Capital sees the immediate profitability of Lingxi Huyu and intends to retain the existing management team, with no major changes expected in the short term.
I. Deal Closed: Change in Owners, but Team Remains Stable
An internal letter from Zhou Bingshu, the CEO of Lingxi Huyu, confirms that Alibaba has sold its shares in the company to Xincheng Capital. Although the owner has changed, the new shareholder, Xincheng Capital, has explicitly approved the current management team, indicating that employees do not need to worry about significant changes and that the company’s daily operations will continue as usual. The rumors about the sale that have been circulating for several months have finally come to an end.
II. Lingxi Huyu’s Strength: Several Profitable Games
Lingxi Huyu employs over a thousand people in Guangzhou and relies on three main games for its revenue:
1. “Romance of the Three Kingdoms: Strategy Edition”: Launched in 2019, it remains a leading SLG (strategic gaming) game in China and is a stable source of income.
2. “Romance of the Three Kingdoms: Fantasy Continent”: A mature second-line product.
3. “Ru Yuan”: A female-oriented game that once ranked in the top five of the iOS bestseller list.
The market estimates that Lingxi Huyu generates annual revenues of 3-4 billion yuan and profits of 1.5-2 billion yuan, making it a profitable and valuable asset.
III. Why Did Alibaba Sell? Strategic Focus on AI
Alibaba sold Lingxi Huyu not because it was unprofitable, but due to a shift in strategic focus:
- Alibaba is now prioritizing AI, and gaming is no longer considered a core business.
- The profits from Lingxi Huyu account for a small portion of Alibaba’s overall earnings (Alibaba’s annual net profit exceeds 100 billion yuan).
- As early as last August, it was evident that Lingxi Huyu’s reporting structure had been changed within Alibaba’s entertainment division, which was seen as a precursor to the potential sale.
IV. Why Did Xincheng Capital Buy? Value in Profitability and Higher Bid
Xincheng Capital is a private equity firm under CITIC Capital that specializes in investing in profitable projects. There are two main reasons why they decided to acquire Lingxi Huyu:
1. High Profitability: Lingxi Huyu has successful games that can generate immediate profits, making it a low-risk investment for the private equity firm.
2. Competitive Bid: Although Alibaba had considered other companies like Century Huatong and Giant Network, Xincheng Capital offered a higher bid (approximately $1.5 billion, or 10.1 billion yuan), which was ultimately accepted.
Xincheng Capital has prior experience in the gaming industry; for example, they participated in Tencent’s acquisition of Finnish game company Supercell in 2016.
V. Industry Perspective: Gaming Remains a Profitable Sector
The gaming industry remains a lucrative field. Analyst Zhang Shule believes that Xincheng Capital’s purchase of Lingxi Huyu is like acquiring a “ready-made money-making asset” and can also help the company expand into more premium markets, especially considering Alibaba’s limited investment in the gaming sector. With Xincheng Capital’s support, Lingxi Huyu may be able to generate even more revenue.
In essence, this transaction represents Alibaba’s decision to dispose of non-core businesses, while Xincheng Capital has found a valuable asset that meets its investment criteria. Both parties have achieved their goals, and for the players, their favorite games will continue to be available without any disruptions in service.