Resumption Of New Games Approval; A Boon To Investor Sentiment
The NPPA had on the 11 April officially announced approval for 45 domestic games, ending an eight-month hiatus of online game approval (vs nine months in 2018). The games being approved are mainly from Baidu, XD.com, Lilith Games and 37Games, whereas Tencent and Netease are not in the list. We remain cautiously optimistic given the resumption will improve near-term sentiment. However, any meaningful financial contribution from the approval of new games should take at least one year to realise. Maintain MARKET WEIGHT.
WHAT’S NEW
• Overview of the notice released by the NPPA. A total of 45 new games has been approved, compared with 87 new games approved in Jul 21 (prior to the start of the suspension). Mobile games developed by Baidu, XD.com, Lilith Games and 37Games such as BangBang Rabbit, FlashParty, Life of The Party, and Dream of Voyage were among those approved by the NPPA based on the notice released yesterday. The new game approval was solely dedicated to domestic developed games only, whereas overseas games (to be published in China) have not had any approvals since 28 Jun 21.
• Our thoughts on the resumption. Back in Aug 21, the suspension by NPPA was started to protect minors from wasting too much time/money on playing games, and to implement restrictions on chaotic/sub-standard online game content. We believe the resumption implies that the overall online gaming industry has met the compliance requirements. This will revitalise market sentiment on the gaming industry and boost the confidence of game companies to invest in and carry out R&D for new games.
• Tencent’s and NetEase’s game performance well on track even without new game approval. According to SensorTower, Tencent’s and NetEase’s weekly mobile game grossing reached levels seen during 2022’s CNY in mid-March, partly due to the lockdowns. We believe the resilient grossing from legacy games, along with new game releases (Tencent’s Black Desert Mobile on 26 April, NetEase’s Dead By Daylight Japan on 28 April) and Banhao resumption should point to game revenue re-acceleration in 2H22 for both Tencent and NetEase. We are confident that game titles of both gaming giants will be included in the approval list in the coming months. Even without the new game approval this month, Tencent still has a backlog of >10 approved games in hand. Meanwhile for Netease, the company still has four titles in hand – Diablo, Eggy Go, Roar of War and Vive Le Football – in addition to the localisation of Harry Potter: Magic Awakened in overseas markets should provide near-term support to its top-line growth. We forecast Tencent/Netease online game revenues to grow by 6%/16% respectively in 1Q22.
• A quick recap of the 2018 incident. The nine-month suspension imposed since Apr 18 was due to the organisational reshuffling as the responsibility for the games industry was transferred from the Ministry of Culture and Tourism (MCT) to State Administration of Press, Publication, Radio, Film and Television (SAPPRFT), which is now known as NPPA. Due to the backlog after a nine-month hiatus, the NPPA had approved an average of 247 games per month for a period of four months before normalising to an average of <150 games approved each month. NPPA published the Dec 18 new game approval on 9 Jan 20, which sent share prices of Tencent and Netease up by 3.8% and 6.6% respectively.
ESSENTIALS
• Earnings impact may take 12 months to reflect. Based on historical data, we notice that
Tencent’s online game top-line growth was rather sensitive towards the suspension of new
game approvals as compared with Netease. Tencent’s online game revenue growth hit a
trough in 1Q19 and eventually normalised to 25% growth in 4Q19 (with absolute revenue
back to pre-suspension level). This is because online game companies typically need to
take at least 9-12 months to finalise their approved games by conducting several rounds
of public testing, discussing licensing agreements with relevant IP holders (if the game
was developed using third-party IP right) and going through marketing and promotional
activity before the game can be officially launched.
EARNINGS REVISION
• We keep our earnings estimates unchanged.
VALUATION/RECOMMENDATION
• Maintain BUY for Tencent (700 HK) with an unchanged target price of HK$502.00. Our
target price implies 32x 2022F PE against its historical average of 30x.
• Maintain BUY for Netease (9999 HK) with an unchanged target price of HK$187.00
(US$120.00). Our target price implies 23x 2022F PE against the company’s historical
average of 22x.
SECTOR CATALYST AND RISK
• Catalysts: a) Increasing user stickiness, b) continue improvement on paying users,
launch of new genre and expansion packs.
• Risks: a) Regulatory risk (ie further restriction on time/money spent), b) smaller
players continue to gain market share via unconventional distribution channels.