We initiated coverage on China Game (A share) sector, with top picks of Perfect World (“PW”) and Sanqi Interactive (“Sanqi”). As China game industry has stepped into mature stage, we expect top players to get stronger, and more opportunities will derive from overseas expansion, selective productions and e-Sports tailwinds.
- Stepping into mature stage. China game market has stepped into a mature stage (with 11% YoY growth in 1H19), despite moderate recovery in 2019 for game approvals relaunch. Mobile games, accounting for 65% of total game market, are still on growth track. Game players saw 5.1% YoY growth in 1H19, and we view players close to saturation given already-high penetration of 61.8%. Looking ahead, 5G, Cloud Game, female gamers and short-video channel marketing could be further drivers.
- The bigger, the stronger. We expect top players to get stronger, with advantages of IP resources, channel marketing, data, and self-development ability. As game market growth slows down and Top 2 leaders continue to gain shares, we think it is important for players to explore other segmentations or new opportunities, including overseas market, female games, mini games and e-Sports tailwinds.
- Eyes on overseas expansion and quality enhancement. After resumption of game licenses approvals, we expect tightening regulations to continue, and game players to focus more on selective IPs and healthy & high-quality productions. Facing tightening regulation and stiff competition in domestic market, major players have put more efforts on overseas expansion and borne initial fruits. China game companies performed well in emerging markets (e.g. SEA), with M&A strategy and RPG & SLG as key categories. We believe leaders are still positioned well in global expansion, supported by richer experience, strategic M&A and broader network channels.
- Initiate with BUY. We initiated coverage of Perfect World (002624 CH) and Sanqi (002555 CH), with TPs of RMB49 and RMB30, representing 26.7x and 26x FY20E P/E. We expect Sanqi to continuously strengthen its position in Chuanqi-themed types development, and deliver ongoing pipeline with category diversification and effective marketing. We expect Perfect World to leverage it valuable IPs to boost mobile momentum, and entertainment segment might see recovery in FY20E.
