We estimate that the net proceeds to us from this offering, after deducting
underwriting discounts and the estimated offering expenses payable by us and
assuming no exercise of the over-allotment options, will be approximately
US$83.3 million, based upon the initial offering price of US$17.00 per ADS. If
the underwriters exercise their over-allotment option in full, we will receive
approximately US$97.7 million. We will not receive any of the proceeds from the
sale of ADSs by the selling shareholders.
The principal purposes of this offering are (i) to create a public market for
our ordinary shares for the benefit of all shareholders, and (ii) to attract and
retain qualified employees by providing them with equity incentives.
We may use the net proceeds from this offering:
† to fund capital expenditures, such as the purchases of servers, computer
software and other equipment in connection with operating additional MMORPGs,
including WoW, Joyful Journey West, Mystina Online and Granado Espada;
† to expand our sales and marketing efforts;
† to license or otherwise acquire new online games attractive to users;
† to fund working capital;
† to repay the outstanding principal amount of our convertible loans and
interest accrued thereon, which together amounted to US$1.25 million as of
November 30, 2004; and/or
† for general corporate purposes.
For a more detailed description of the terms of our outstanding convertible
loans that we will repay with the net proceeds from this offering, see “Related
Party Transactions — Convertible Loan Agreement.”
In utilizing the proceeds of this offering, we may make loans to our
subsidiaries and consolidated affiliated Chinese entities, or we may make
additional capital contributions to these entities. Any loans or capital
contributions to our Chinese subsidiary or affiliated Chinese entities are
subject to Chinese regulation and approval. For example:
† loans by us to The9 Computer, as a foreign invested enterprise, to finance
its activities cannot exceed statutory limits and must be registered with the
State Administration of Foreign Exchange; and
† loans by us to Shanghai IT, which is a domestic enterprise, must be approved
by the relevant government authority and must also be registered with the
State Administration of Foreign Exchange.
We may also determine to finance The9 Computer by increase of capital
contributions. These capital contributions must be approved by the Ministry of
Commerce. Because Shanghai IT and Shanghai Advertisement are not foreign
invested enterprises, we are not likely to finance their activities by means of
a capital contribution due to regulatory issues relating to foreign investment
in domestic Chinese enterprises, as well as the licensing and other regulatory
issues discussed in “Chinese Government Regulations” elsewhere in this
prospectus. We cannot assure you that we can obtain these government
registrations or approvals on a timely basis, if at all, with respect to future
loans or capital contribution by us to our Chinese subsidiary or affiliated
Chinese entities.
We have not identified amounts we plan to spend on each of these areas or the
timing of expenditures. Our management will have considerable discretion in the
use of the net proceeds received by us from this offering. Pending specific
application of the net proceeds, we plan to invest our net proceeds in
short-term bank deposits.
We compete principally with the following three groups of competitors in China:
† online game operators in China, including Shanda Interactive Entertainment
Limited (which operates Actoz Soft’s “Legend of Mir 2”) and Guangzhou
Optisp’s (which operates Wemade’s “Legend of Mir 3”);
† major Internet portal operators in China, including publicly-listed companies
such as NetEase (which operates “Westward Journey Online”), Sina (which
operates “Lineage I” and “Lineage II”) and Sohu (which operates “Knights
Online”), all of which leverage their existing strength in aggregating
content, and marketing and cross-selling among their established Internet
user base to promote online games;
† overseas online game providers including Enix Softstar Inc. (which operates
“Crossgate”), Gamania (which operates “Laghaim”) and Softworld (which
distributes “Ragnarok”); and
† domestic online game developers in China, including Kingsoft (which has
developed “JX Online”).
Our existing and potential competitors may compete with us in marketing
activities, quality of online games and sales and distribution network. Some of
our existing and potential competitors have significantly greater financial and
marketing resources than we do. For a discussion of risks relating to
competition, see “Risk Factors – Risks Related to Our Company – We may not be
able to maintain our profitability, financial or operational success in our
market as we operate in a highly competitive industry and compete against many
large companies.”
IDC, a leading
market research firm. We began to offer our self-developed online virtual
community game “the9 City” in 2000 and commercialized the9 City in December
2000. Currently, our business is primarily focused on operating “MU” in China
through 9Webzen in which Webzen Inc., a leading online game developer and
operator in Korea, owns 49%. 9Webzen has obtained an exclusive license from
Webzen to operate MU in China. MU is a three-dimensional, or 3D, massively
multiplayer online role playing game, or MMORPG, which allows thousands of
players to concurrently log on to network servers to “role-play” characters in a
virtual world. Because MMORPGs require a significant amount of time to master,
they tend to have a high degree of user attraction, which means that users tend
to spend greater amounts of time playing these games than using other Internet
applications. In the three months ended September 30, 2004, we recorded over
189,000 MU peak concurrent players and over 134,000 MU average concurrent
players, which measure the highest and daily average numbers, respectively, of
game players simultaneously logged on to our game servers. During the same
period, we also recorded over 1,527,000 average monthly active paying MU
players, which measures the monthly average of the total number of game players
who have used their prepaid game playing time during each month of the quarterly
period. According to a December 2003 report issued by IDC, MU was ranked among
the three most popular online games in China.
To broaden our product and service offerings, we have obtained exclusive
licenses to localize and operate additional MMORPGs in China, including “World
of Warcraft,” or WoW, “Mystina Online” and “Granado Espada.” WoW is an MMORPG
developed by Blizzard Entertainment, the game development studio of Vivendi
Universal Games Inc., which has developed award-winning PC games including the
Warcraft, Diablo and StarCraft series. We intend to launch a test version of WoW
in China in the first half of 2005 followed by the commercial launch in 2005. In
addition, we have recently obtained an exclusive license to operate “Mystina
Online” in China. Mystina Online is a new MMORPG developed by an online game
developer in China. We are currently operating an open test version of Mystina
Online and expect to commercially launch the game in early 2005. We have also
recently obtained an exclusive license from Hanbitsoft, Inc. to localize and
operate Granado Espada in China. Granado Espada is an MMORPG that is currently
being developed by Korean game developer IMC Games, Co., Ltd., which is partly
owned by Hanbitsoft. We are aggressively expanding our own product development
capabilities to develop a suite of proprietary online games, including MMORPGs.
We currently expect to launch the test version of our first proprietary game,
“Joyful Journey West,” a side scrolling MMORPG based on cartoon characters, in
early 2005, followed by the commercial launch in 2005. In addition, in April
2004, we invested US$4.0 million for a 20% stake in Object Software, an
established game developer based in China which has developed a number of PC
games and online games including several award-winning games. Concurrently with
our equity investment, we have obtained a right of first refusal to acquire
licenses to operate in China all the online games developed by Object Software
during the first two-year period after our investment. Furthermore, we have
begun to offer game-related short messaging services, or SMS, including player
accounts password protection service.
We charge customers for the time they spend playing our online games. Our
customers typically access our online games through PCs at home or in Internet
cafs. They obtain our game playing time primarily through purchasing our prepaid
cards at various retail outlets or purchasing online points at one of the more
than 115,000 Internet cafs throughout China which have subscribed to our Pass9
system. Pass9 is our proprietary, fully integrated online membership management
and payment system, which offers one-stop account management and payment
services to our customers and facilitates our payment arrangements with
distributors and Internet cafs. To ensure quality customer service and seamless
operations, we maintain a powerful technology platform consisting of over 2,400
servers and over 290 network devices.
We have been actively managing the daily operations of 9Webzen since its
inception in October 2002. We account for our interest in 9Webzen using the
equity method as Webzen has the right to participate in certain decisions to be
made in the ordinary course of business of 9Webzen. We currently derive our
revenues primarily from provision of game operating support services to 9Webzen
in connection with operating MU in China. 9Webzen derives substantially all of
its revenues through the sales of prepaid cards and prepaid online points for MU
playing time to distributors, who in turn sell them to end customers. In 2003
and the six months ended June 30, 2004, we generated net income of RMB48.5
million (US$5.9 million) and RMB13.6 million (US$1.6 million), respectively, and
9Webzen generated net income of RMB97.8 million (US$11.8 million) and RMB21.9
million (US$2.6 million), respectively. In the nine months ended September 30,
2004, we and 9Webzen generated net income of RMB16.7 million (US$2.0 million)
and net income of RMB32.9 million (US$4.0 million), respectively.
Our principal executive offices are located at 30/F CITIC Square, No. 1168
Nanjing Road (West), Shanghai 200041, People’s Republic of China, and our
telephone number is (8621) 3217-4567. In addition to our operational
headquarters in Shanghai, we currently have a small branch office in Beijing.
Our principal websites are located at www.the9.com and www.muchina.com.