CMGE responds to allegations of questionable business practices

China Mobile Games and Entertainment Group Limited (CMGE), the largest publisher and a leading developer of mobile games in China, stated in response to allegations made by a US short seller recently that the allegations have confused the connections between Shenzhen Zhongzheng Ruanyin Science and Technology (Zhongzheng) and CMGE.

Geoinvesting, a short seller based in the US, mentioned on January 15 that CMGE is engaging in questionable business practices and has overstated its revenues, creating an environment that allows for the transfer of revenue away from the company to a non-disclosed related entity, Zhongzheng.

CMGE responded to the allegations on the following day, saying that the allegations contain numerous errors and the speculations have no basis.

"Zhongzheng was founded in November 2009, and I was the founder and CEO back then but have since left Zhongzheng," Shuling Ying, CMGE's chief operating officer, said. "Zhongzheng provided mobile game promotion at that time."

Ying said he started cooperating with Xiao Jian, the CEO of CMGE, in 2012, as they faced the challenges of expanding in the large mobile game market, and Xiao at that time was transforming their business from feature phone to smartphone games and was building a new team for mobile games publishing. Ying said he later joined CMGE in June 2013 as one of the team leaders in the mobile game publishing division, after disposing of all his shares in Zhongzheng. He became the COO of CMGE last October.

Yet the previous team working with Ying remained at Zhongzheng.

"Of all CMGE's revenue in the first three quarters in 2014, less than one percent came from Zhongzheng and payments made to Zhongzheng for the first three quarters of 2014 accounted for approximately 3.0% of CMGE's operating expenses for the same period.," Ying said. "It is not possible that CMGE transferred revenue to, or generated significant revenue from, Zhongzheng. Furthermore, Zhongzeng is just one of CMGE's many mobile game advertising agents and CMGE has no control over Zhongzheng's business."

"Consistent with China's mobile game market practice for Android and iOS, some mobile game advertising agents put their names on the mobile games for promotion of the games and the convenience of game uploads, even though game titles belong to the publishers and revenue collection is done by the publishers and the app store platforms. In the games mentioned by Geoinvesting, revenue collection is done by CMGE and app store platforms and not through Zhongzheng."

CMGE said it has conducted its business with Zhongzheng at arm's length.

Ying also mentioned that in October 2014, Zhongzheng's lease for its old office expired and it was in the process of looking for a new office space. CMGE agreed to temporarily lease part of its office in Shenzhen to Zhongzheng during the transition. Both Zhong Zheng and CMGE agreed that Zhongzheng should secure a new office space and move out of CMGE's Shenzhen office and change its registered address as soon as possible.