20180306-招商证券_香港_-China_Internet__Online_gaming_update__Survival_games__an_innovative_category_with_huge_potential_28页_4mb

Summary of China Internet: Online Gaming Update

Core Content

This report provides an analysis of the online gaming market in China, with a focus on the survival game genre, particularly the impact of PUBG and its mobile adaptations by Tencent and NetEase. It highlights the competitive landscape, market share, user engagement, monetization strategies, and future outlook for survival games in the Chinese market.

Main Points

• Market Share Dominance:
  Tencent and NetEase collectively dominate the Chinese online gaming (OLG) market, holding 68% of the market share in 2017, up from 64% in 2016.

• Survival Games as a New Genre:
  Survival games are an innovative category with huge potential, and are expected to grow significantly in the coming years.

• PUBG Mobile Launch:
  Tencent launched two PUBG mobile games, PUBG Full Strike and PUBG Provoking Battleground, on Feb 9, 2018, which quickly ranked 1st and 3rd on the China iOS Top Free Games list.

• Tencent's Strategy:
  Tencent focuses on increasing DAU (Daily Active Users) first, and monetization later. It aims to become the leader in survival games and surpass NetEase in terms of DAU.

• NetEase's Performance:
  NetEase's Knives Out and Terminator 2 were early leaders in the survival game genre. Knives Out achieved 25mn DAU and over 200mn registered users by Feb 5, 2018. NetEase is expected to generate RMB1.5-2bn revenue from these games in 2018.

• Market Potential:
  The report estimates that China's survival game market in 2018 could reach RMB5-7bn (base case), with the biggest player capturing 50-60% of the market and the runner-up capturing up to one-third.

• Monetization Models:
  Survival games are expected to have mid-monetization ability. Developers can monetize through in-game items, advertising, eSports tournaments, and game memberships.

• User Engagement:
  HoK (Honor of Kings) remains the top game in China, with a DAU of 64mn and penetration rate of 21.78%, outperforming survival games in terms of user retention and growth longevity.

• Tencent's Competitive Edge:
  Tencent has the original PUBG IP and superior game quality, which supports its two PUBG mobile games. It also has massive traffic from WeChat and QQ, giving it a strong advantage in user acquisition and promotion.

• Challenges:
  Premature monetization and game hacking issues have negatively impacted user experience for NetEase's games. User retention and DAU have dropped significantly after monetization began.

• Industry Outlook:
  The report concludes that Tencent and NetEase will remain the dominant players in China's gaming market. Both are recommended as BUY due to their strong performance and future growth potential.

Key Information

• PUBG's Success:
  Originally launched on Steam in 2017, PUBG became a global phenomenon and inspired the survival game genre.

• Gameplay Differences:
  Survival games are more complex than MOBA games like HoK, which are easier to learn and have a higher user retention rate.

• User Demographics:
  HoK has a more balanced user base, with 54.1% female users, which is beneficial for monetization through appearance customization.

• Monetization Challenges:
  Survival games face monetization hurdles, including user experience issues and low retention rates after monetization begins.

• Financial Forecasts:

  • Tencent: Expected to generate RMB3-5bn from survival games in FY18, representing 3-5% of its mobile gaming revenue.
  • NetEase: Expected to generate RMB1.5-2bn from survival games in FY18, representing 15-20% of its mobile gaming revenue in a bull case.

Figures and Data Highlights

• Top Free Games (March 5, 2018):

  • 1st: PUBG: Provoking Battleground (Tencent)
  • 2nd: HoK (Tencent)
  • 3rd: PUBG: Full Strike (Tencent)
  • 4th: QQ Speed (Tencent)
  • 8th: Knives Out (NetEase)
  • 10th: CrossFire (Tencent)

• Top Grossing Games (March 1, 2018):

  • 1st: HoK (Tencent)
  • 2nd: QQ Speed (Tencent)
  • 3rd: Fantasy Westward Journey (NetEase)
  • 4th: Chulixiang (NetEase)
  • 5th: Knives Out (NetEase)
  • 10th: The Demi-Gods and Semi-Devils Mobile (Tencent)

• User Engagement Metrics:

  • Knives Out: DAU of 25mn, registered users of 200mn, penetration rate of 5.55%
  • Terminator 2: DAU of 8.51mn, registered users of 80mn, penetration rate of 1.96%
  • HoK: DAU of 64mn, penetration rate of 21.78%

• Tencent's Strategy:

  • Focus on DAU growth before monetization
  • Add social features to promote word-of-mouth
  • Make games accessible on low-end devices

• Financial Targets:

  • Tencent: Target price of HK$500, implying 40x FY19 P/E
  • NetEase: Target price of US$399, implying 17.3x FY18 P/E

Conclusion

Survival games, particularly PUBG mobile, are a high-growth segment in the Chinese gaming market, with Tencent and NetEase leading the charge. Despite challenges with monetization and user experience, the genre has strong potential due to its innovative gameplay and IP strength. The report recommends BUY for both companies, highlighting their market leadership and future growth opportunities.