China’s Snail Games is aiming for IPO, but it’s perched on the brink of an abyss

For the second time in as many years, Chinese game developer and publisher Snail Games has its sights set on an IPO. The company, which originally was hoping for a Hong Kong IPO last year, is reportedly aiming for an IPO again, this time on the domestic stock market.

But according to Sina Tech, the company’s prospectus reveals some concerning information. The biggest red flag is that Snail Games’s revenues are coming primarily from a single PC game called Age of Wulin, and that game is losing players.

Age of Wulin first came out in China in 2012, and it quickly became a hit. After two years of significant financial losses, Age of Wulin revenues rocketed Snail Games to a successful 2013 that saw the company bring in profits of more than US$20 million on the year. But since then, revenues and profits have been shrinking again as Age of Wulin ages and players move to other games.

That players are leaving Age of Wulin is not a surprise or concern in and of itself; it is part of the natural life cycle of an online game. Very few can achieve the long-term success of a game like World of Warcraft, and most games go through a natural stage of growth and decline over a few years. The issue for Snail Games is that it doesn’t seem to have another game set to take up Age of Wulin‘s mantle once that game is gone. When revenues from Age of Wulin inevitably dwindle further, what will the company replace them with?

Snail Games is always developing new games, of course, but it faces an uphill battle in any market it chooses to attack. In both mobile and PC gaming, the market is now dominated much more powerful players, and user standards for production values are increasing rapidly. That is causing the cost of developing new games to increase, which makes every failed game a bigger financial burden. A company like Tencent is large enough to absorb those expenses with relative ease. But for Snail Games, and few wrong steps could spell disaster.

Of course, a successful IPO would give the company a flood of capital that could help it absorb the cost of developing new titles for both PC and mobile. But Snail is reportedly just looking to raise US$32 million in its listing, which can only go so far. Consider: Tencent pulled in US$3.9 billion in revenues last year. That may be an unfair comparison, but the reality is that gaming is an unfair market in China in 2015. Companies like Tencent with massive revenue streams and a hand in every corner of the internet industry are going to have an easier time developing, marketing, and monetizing hit games on any platform. And that could leave smaller, wholly game-focused companies like Snail Games out in the cold.

Especially if the company can’t come up with another hit to replace Age of Wulin when its candle burns out for good.