20181228-招商证券_香港_-Game_Sector__true_worth_withstands_headwinds_4页_520kb

Game Sector: True Worth Withstands Headwinds

Core Content

This report provides an analysis of the Chinese gaming industry, focusing on the performance and future outlook of leading companies Tencent and NetEase. It highlights the impact of regulatory changes, market concentration, and overseas expansion on the sector.

Main Points

Market Trends and Regulation

• Market Concentration: The gaming market in 2018 saw increased concentration, with Tencent leading in market share due to its high-ranking new games.
• Regulatory Impact: The gaming market received RMB214.4bn in revenue in 2018, a 5.3% YoY increase, but the growth was slowed by the suspension of game license approvals since March 2018.
• Regulation Resumption: License approvals are expected to resume in the first quarter of 2019, with stricter regulations emphasizing quality over quantity.
• Regulatory Emphasis: The regulatory environment will focus on cultural mandates, social responsibility, industry transformation, and promoting high-quality games in overseas markets.

Company Performance

• Tencent (700 HK): Maintains a strong position in the market with a target price of HK$414 and a 34% upside. It has a robust presence in both domestic and international markets.
• NetEase (NTES US): Also benefits from the regulatory changes due to its strong game development capabilities. Its target price is US$292, with a 19% upside.
• Market Dominance: In 2018, Tencent and NetEase together secured 34 of the top 50 mobile games and 81.1% of the top 50 grossing revenue. Their dominance is increasing, with Tencent securing 16 of the top 20 ranks and 9 of the top 10 ranks.

Overseas Revenue

• NetEase: Reclaimed the top spot in overseas revenue in November 2018, attributed to its collaboration with popular comics and expansion into new markets.
• Tencent: Achieved a No.5 position in overseas revenue, with PUBG Mobile generating US$32.5mn in revenue in November 2018, a 44% MoM increase.

Financials

Investment Ratings

• Industry Rating: OVERWEIGHT – the sector is expected to outperform the market over the next 12 months.
• Company Rating:
  • BUY: Expected to generate 10%+ return over the next 12 months.
  • NEUTRAL: Expected to generate +10% to -10% return.
  • SELL: Expected to generate a loss of 10%+ return.

Key Information

• License Approval Resumption: Expected in 1Q19, with stricter regulations likely to benefit Tencent and NetEase due to their superior game development and compliance capabilities.
• Overseas Expansion: Both Tencent and NetEase are focusing on overseas markets, with NetEase currently leading in overseas revenue.
• Market Health: The industry is expected to see more healthy and sustainable future developments due to the focus on quality and innovation.

Figures and Data

• Figure 1: China's gaming market revenue.
• Figure 2: China mobile gaming market revenue.
• Figure 3: Tencent and NetEase's market shares in Top50 mobile games measured by gross billings.
• Figure 4: Tencent and NetEase's number of games in the top50 grossing list.
• Figure 5: Share of new games once entered the top50 monthly grossing rank in 11M2018.
• Figure 6: Game company ranking measured by overseas revenue in November 2018.

Analysts

• Leo LIU, CFA: Contact: +852 3189 6117, leoliu@cmschina.com.hk
• Matt MA: Contact: +852 3189 6394, mattma@cmschina.com.hk

Disclaimer

This document is prepared by China Merchants Securities (HK) Co., Limited. It is for information purposes only and does not constitute investment advice. The information and opinions expressed are based on sources believed to be reliable, but CMS HK does not guarantee their accuracy, completeness, or correctness. The contents are current as of the date of publication and may change without notice. Past performance is not indicative of future results. Investors are advised to independently evaluate investments and strategies, and to seek financial and tax advice.