R e g i o n a l M o r n i n g N o t e s Wednesday, 19 June 2024

SECTOR UPDATE MARKET WEIGHT

Internet – China (Maintained)
Shelter Against Mounting Competition And Soft Momentum During Summer Holiday
We expect a lukewarm 2Q24 and 3Q24, with mobile grossing growth expected to SECTOR PICKS
reaccelerate gradually in 4Q24, primarily due to soft grossing momentum during the Share Target
Company Ticker Rec Price Price
summer holiday ahead amid mounting competition. We opine that the growth of the (HK$) (HK$)
online games sector in 2024 will be fuelled by: a) normalised industry development with Tencent 700 HK BUY 381.4 454
regular issuance of game licences, b) consolidation of top game producers, and c) a Source: UOB Kay Hian
promising pipeline of blockbuster games. Maintain MARKET WEIGHT.
WHAT’S NEW
• Overview of grossing in 2Q24. According to Gamma Data, China's game grossing
dropped 4.2% mom and 0.3% yoy to Rmb22.4b in Apr24. This was mainly due to a decline
in mobile game grossing, but supported by client-based game grossing growth of 2.1%
mom and 1.5% yoy to Rmb5.6b, which was primarily contributed by cross-platform
products. The grossing of Chinese self-developed games in the overseas market dipped
0.7% mom but grew 7% yoy to US$1.4b in Apr 24, stemming from contribution of new
games. According to Sensor Tower, 40 Chinese publishers made it to the top 100 global
mobile game publishers by grossing in May 24, collectively generating US$2.11b
(Rmb15.352b) and accounting for 39.7% of the total revenue of the top 100 global mobile
game publishers. We expect the online games sector to be highly competitive throughout
2024, particularly during the summer holiday.
• Tencent: Grossing reaching an inflection point due to rejuvenation of evergreen
games. We expect Tencent's 2Q24 game revenue to report a reaccelerated growth of
5.5% yoy (vs -1.4% in 1Q24). Tencent reiterated a stable game regulatory environment,
with minor protection measures fully in place. Evergreen games including Supercell key
titles Clash Royale and Clash of Clans saw their grossing double after a successful
revitalisation. Brawl Stars’ grossing has quadrupled, while PUBG mobile has reached an
initial grossing inflection point which should be followed by a more profound growth moving
into FY25 due to a long deferral period.
Mini games saw rapid growth and high margin contribution while mini games with more
than three years' lifecycle also delivered solid growth. DnF mobile was launched on 21
May and topped domestic iPhone grossing rankings in the fourth week after its launch.
DnF has become the most commercially successful game in the domestic iOS market and
has surpassed the combined revenue of Honor of Kings and Peacekeeper Elite for the
past four weeks. This success contributed to a 12% mom growth in Tencent's mobile
game revenue in May. We estimate grossing of Rmb15b or an 11% incremental mobile
revenue contribution in the first 12 months.
• Netease: Adjustments to legacy desktop game Fantasy Westward Journey (FWJ).
We forecast Netease's 2Q24/2024 game revenue to rise 11%/11% yoy mainly on a better
contribution from its legacy title, FWJ, following strategic adjustments that aim to limit
professional gamers and enhance the in-game ecosystem. We believe these adjustments
will help the nearly two-decade-old PC version of FWJ maintain its popularity despite ANALYST(S)
short-term fluctuations in revenue. Recent feedback from ordinary gamers indicates high
Julia Pan
loyalty to FWJ, which serves not only as an online entertainment platform but also as a
+8621 5404 7225 ext 808
community where they regularly connect with friends met through the game. On 17 June, juliapan@uobkayhian.com
Netease’s self-developed top-down action MMORPG Nightmare Breaker ceased
operations after being online for three years. We believe the market has overpriced in the Soong Ming San
soft performance of FWJ. Based on the solid 1Q24 deferred revenue growth of 14% yoy, +603 21471912
we believe 2Q24 game revenue growth could exceed the market’s bearish expectation. mingsan@uobkayhian.com

PEER COMPARISON
Company Tickers Rec Price @ Target Upside/ Market ------------- PE -------------- -------- EV/EBITDA ------- ---------- EV/Sales -------- ROE
17 Jun 24 Price (Downside) Cap 2024F 2025F 2026F 2024F 2025F 2026F 2024F 2025F 2026F 2024F
(lcy (lcy) to TP (%) (lcy m) (x) (x) (x) (x) (x) (x) (x) (x) (x) (%)
Tencent 700 HK BUY 381.4 454 19.0 3,587,788 17.2 15.3 13.6 13.4 12.0 11.0 5.0 4.6 4.2 16.1
Netease 9999 HK BUY 145.2 180 24.0 468,235 13.0 12.2 11.4 9.4 8.4 7.7 2.9 2.7 2.5 25.7
Source: Bloomberg, UOB Kay Hian

Refer to last page for important disclosures. 1

R e g i o n a l M o r n i n g N o t e s Wednesday, 19 June 2024

STOCK IMPACT TENCENT 12-MONTH FORWARD PE BAND

50
• Overview of NPPA game approval. On 20 May 24, the National Press and Publication 45
(x)
+1std
40
Administration (NPPA) issued the fifth batch of approvals for 2024, with 96 Banhao for 35
30
domestic games in May 24 vs the 95/107/111 approvals in April/March/February 25 Mean=26x
20 -1std
respectively. Among the 96 new game approvals, six were for mobile and client cross- 15
10
platform games, the remaining 90 were for mobile games (including 39 casual puzzle
games). To date, 61 licences have been issued for imported games including the recent 15 1yr forward PE -1 Std Dev Mean +1 Std Dev

new games on 5 June that include three switch games - Pokémon Let's Go, Pikachu!, Source: Bloomberg, UOB Kay Hian
Super Mario 3D World + Bowser's Fury, and Daemon X Machina, as well as the PC game NETEASE 12-MONTH FORWARD PE BAND
Black Desert. Ytd, Tencent and Netease have received three and two licence approvals for
(x)
domestic games respectively. All in all, these indicate a continuous positive regulatory 40
environment which will foster solid monetisation for both companies. 35
30
• Upcoming pipeline appears promising. a) Tencent's upcoming domestic games 25 +1 std
launches include Need For Speed, an open world car racing, which will commence a 20 Mean=15.4x
15
public beta on all platforms starting 11 July. The game is developed by Tencent's TiMi -1 std
10
Studio and officially licensed by EA and boasts a vast "100m sqm open world". Other 5
games in the pipeline include Tarisland as a MMORPG, Delta Force as an FPS and One
Piece: Ambition, an action game. On 11 June, Tencent and Riot Games released the first 1yr forward PE -1 Std Dev
official teaser for the second season of League of Legends: Arcane and is set to launch in Mean +1 Std Dev
Source: Bloomberg, UOB Kay Hian
Nov 24. Valorant Mobile also received an imported game licence on 5 June and is a
medium-term pipeline while Path of Exile 2 is an international games pipeline. b) Netease
is set to re-launch Blizzard's games in China, starting with World of Warcraft (WoW) with a
projected official release in China in July. Prior to the temporary exit in Jan 23, Blizzard's
games contributed a low-teens to Netease's PC game revenue. We are optimistic about
Netease's upcoming titles, Where Winds Meet PC and mobile Naraka Bladepoint. Both are
expected to be launched in July and have strong potential to become hit titles.
EARNINGS REVISION/RISK
• We leave our forecasts largely unchanged.
VALUATION/RECOMMENDATION
• Maintain BUY on Tencent Holdings (700 HK) with a target price of HK$454.00 as we
assigned SOTP valuation multiples on online game/social networking/online ad at
18x/20x/20x respectively. Tencent is confident about its mini-game development and
expects the upcoming new game licence approval to stimulate further innovation. Our
target price implies 20x 2024F PE. Tencent is trading at attractive 15x 2024-25F PE, below
its historical mean of 26x.
• Maintain BUY on Netease Inc (9999 HK) with a target price of HK$180.00
(US$115.00), in view of the disappointing results generated by Legend of the Condor
Heroes upon its release. We remain cautiously optimistic and expect solid top-line growth
recovery from the return of Blizzard games. Our target price implies 15x 2024-25F PE. The
company is currently trading at 12.5x 2024F PE, against its historical mean of 15.4x.
SECTOR CATALYST AND RISK
• Catalysts: a) Increasing user stickiness, b) continued improvement in the number of
paying users, and c) launch of new game genres and expansion packs.
• Risks: a) Regulatory changes (ie further restriction on time/money spent), and b) fewer
players trying to gain market share via unconventional distribution channels.

Refer to last page for important disclosures. 2

R e g i o n a l M o r n i n g N o t e s Wednesday, 19 June 2024

NPPA BANHAO APPROVALS

800 China game license approval volume monthly trend

749
727

700

600
Game approvals 102 new game approvals per month
506 suspended for 8 on average since the new Banhao Game approvals Banhao approval back to
500 months since Apr- review policy in April 2019 until July suspended for 8 months pre-suspension level in
18 2021 since Aug-21 2021 since Dec-22

400

283 279
300 263

191 188
200 164 163 169
147
130 131
124
112 106 101110109 117116 129 129
112 113 121
105 111 95111
87 85 84 8686 87 87 86868988 898787
100 55
71
54 67 60676973 70
40 45 45
22 31

0
Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Mar-24
Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Sep-23
Jan-18

May-18

Nov-18
Jan-19

May-19

Nov-19
Jan-20

May-20

Nov-20
Jan-21

May-21

Nov-21
Jan-22

May-22

Nov-22
Jan-23

May-23

Nov-23
Jan-24

May-24
Jul-18

Jul-19

Jul-20

Jul-21

Jul-22

Jul-23
Source: NPPA, UOB Kay Hian

ONLINE GAME COMPANIES

Price Market -------------- PE --------------- --------- EV/EBITDA -------- ----------- EV/Sales --------- ROE
Company Tickers Currency Year End 17 Jun 24 Cap 2024F 2025F 2026F 2024F 2025F 2026F 2024F 2025F 2026F 2024F
(lcy) (lcy m) (x) (x) (x) (x) (x) (x) (x) (x) (x) (%)
HK-listed Chinese Internet & game companies
Tencent 700 HK HKD 12/2023 381.4 3,587,788 17.2 15.3 13.6 13.4 12.0 11.0 5.0 4.6 4.2 16.1
Netease 9999 HK HKD 12/2023 145.2 468,235 13.0 12.2 11.4 9.4 8.4 7.7 2.9 2.7 2.5 25.7
Kingsoft Corp 3888 HK HKD 12/2023 25.2 33,747 26.5 20.2 16.7 5.6 4.6 3.9 1.7 1.4 1.2 2.8
IGG 799 HK HKD 12/2023 3.0 3,511 6.6 6.5 4.4 4.1 4.7 1.8 0.4 0.4 0.4 2.7
Netdragon 777 HK HKD 12/2023 12.4 6,609 6.1 5.2 4.7 3.0 2.6 2.3 0.7 0.7 0.7 8.6
Bilibili 9626 HK HKD 12/2023 117.6 49,540 n.a. 45.6 23.1 47.1 17.7 15.1 1.5 1.3 1.2 -31.4
XD 2400 HK HKD 12/2023 20.5 9,829 21.9 15.9 13.7 15.7 10.4 8.7 1.7 1.5 1.4 -4.6
Average 13.0 16.8 12.5 14.0 8.6 7.2 2.0 1.8 1.6 13.3

US-listed global Internet & game companies

Microsoft MSFT US USD 06/2023 442.6 3,289,316 35.2 30.5 26.1 23.7 20.5 17.4 12.6 11.0 9.6 38.5
Electronic Arts EA US USD 03/2024 136.0 36,135 18.7 16.9 15.6 14.3 13.2 12.2 4.7 4.4 4.2 17.2
Take-Two TTWO US USD 03/2024 159.0 27,243 63.5 26.0 18.4 49.9 21.1 15.7 5.4 4.0 3.7 -50.9
Average 39.2 24.5 20.0 29.3 18.3 15.1 7.6 6.5 5.8 1.6

Other game companies

Nintendo 7974 JT JPY 03/2024 8,411.0 10,923,282 25.9 24.4 21.2 19.6 18.7 15.8 5.9 5.3 4.7 20.1
Sony 6758 JT JPY 03/2024 12,695.0 15,851,226 16.0 14.8 13.4 8.4 7.9 7.6 1.4 1.4 1.4 13.7
Nexon 3659 JT JPY 12/2023 2,906.0 2,442,581 23.2 20.5 18.4 13.6 11.3 10.5 4.2 3.8 3.6 5.9
Ubisoft UBI FP EUR 03/2024 21.3 2,719 13.9 11.7 10.4 4.1 3.6 3.3 1.7 1.6 1.5 9.4
Ncsoft 036570 KS KRW 12/2023 185,800.0 4,079,057 22.6 15.4 13.3 11.9 7.1 6.2 1.6 1.3 1.2 4.8
Bandai Namco 7832 JT JPY 03/2024 2,989.0 1,972,740 21.0 19.0 17.1 10.9 9.6 8.7 1.6 1.5 1.5 15.0
Average 32.2 17.1 15.6 12.0 9.2 8.7 2.6 2.4 2.3 9.7
Source: Bloomberg, UOB Kay Hian

Refer to last page for important disclosures. 3

R e g i o n a l M o r n i n g N o t e s Wednesday, 19 June 2024

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R e g i o n a l M o r n i n g N o t e s Wednesday, 19 June 2024

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Refer to last page for important disclosures. 5