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Mobile game market to triple in size to 152b yuan by 2018, with Tencent out in front

4G and Wi-Fi present more opportunities, while quicker pace of life and longer working hours increase demand for entertainment on the move

PUBLISHED : Friday, 01 July, 2016, 5:55pm
UPDATED : Friday, 01 July, 2016, 10:54pm

China’s mobile gaming market may triple in size within three years, which could push the value of shares in market-leader Tencent Holdings to record highs, according to analysts.

The overall internet games sector has been expanding rapidly over the past five years, and was worth 143.6 billion yuan at the end of 2015, according to research by consulting firm iResearch.

That figure was generated by both domestic player consumption and overseas revenue earned by mainland game developers.

The mobile game segment, in particular, saw its market double in size to a historic high of 56.2 billion yuan and it now accounts for 39 per cent of the domestic internet game market, up from 11.6 per cent in 2011, and is expected to hit 60.5 per cent by 2018.

“Tencent’s mobile game business provides sustainable revenue,” UBS analysts Erica Poon Werkun and Angela Xu wrote in a research report.

“We believe the market has not fully priced in the longer-term growth potential of both NetEase [China’s second largest internet and online game services provider] and Tencent’s mobile game businesses.”

iResearch also found 66.4 per cent of mobile game players spend more than 30 minutes every day playing, while 28 per cent admitted they had spent more time in 2015 than they had the previous year.

The consulting firm now expects China’s mobile game market alone to nearly triple in size to 151.84 billion yuan by 2018, pushing the country’s total internet game market to 251.6 billion yuan.

“The sharp growth is partly due to the entrance of traditional game developers, such as NetEase, into the mobile game industry,” the iResearch report said.

Mobile game segment now accounts for 39 per cent of the domestic internet game market, up from 11.6 per cent in 2011, and is expected to hit 60.5 per cent by 2018.
iResearch.

NetEase’s Fantasy Westward Journey, a massively successful multiplayer online role-playing game (MMORPG), has topped the mainland mobile game rankings since its launch in March 2015.

The wider use of 4G and Wi-Fi continues to provide more opportunities for mobile game producers in China, while people’s higher living standards are also creating bigger demand for entertainment, iResearch said.

Another driving force is the quicker pace of life and longer working hours, which is creating more demand for games on the move, rather than those played on a computer, it said.

But the competition is also becoming fiercer.

The overall number of mobile game players was static last year, hitting a ceiling of around 395 million by December, the research showed, and the study said game developers will have to try harder to hold onto their users, while grabbing new ones.

“The market remains concerned about the sustained monetisation capability of mid- to hard-core mobile games, as their normal life cycle is around 6-12 months,” the UBS report said.

But it predicts a sharp rise in demand in the mobile market, driven by MMORPGs, more diversified genres, and more gaming with unique intellectual property.

Hong Kong-listed internet giant Tencent, as the dominant domestic player, is seen as the main beneficiary of the boom.

Its revenue from smartphone games in 2015 surged 53 per cent year on year to 21.3 billion yuan, compared with the 7.89 billion yuan recorded by the second largest player NetEase, and third-placed Qihoo 360, with revenue of 2.25 billion yuan.

Tencent shares have risen 32 per cent in value since February, and hit its historic high of HK$177.1 a week ago, amid expectation the Shenzhen Hong Kong Stock Connect would be up and running soon.

China’s biggest gaming group also revealed plans to buy a majority stake in Clash of Clans mobile games maker Supercell, from SoftBank Group Corp late last month, in a deal valued at roughly US$8.6 billion.

That purchase will expand Tencent’s interests overseas, as the Chinese video game and social network group still relies mainly on its home market even though it has stakes in various foreign studios like Epic Games and Riot Games.

Finnish mobile game maker Supercell will now have Tencent’s backing as it also pushes more aggressively into China’s online gaming market.

Guotai Junan International gives Tencent a target price of HK$210 by the year end, while Credit Suisse set the target price at HK$190, while HSBC set the price at HK$185.

Daiwa Capital Markets analysts John Choi and Alex Liu said in a note that Tencent’s unrivalled gaming operation and distribution capability will boost Supercell’s existing performance in China, and Tencent could also leverage on Supercell’s insight to expand its own offerings to global markets.

“After the deal, we see a solidified market leader position for Tencent in the mobile game industry globally,” Choi and Liu said.

Strength in social networking will be essential for the Chinese group in future, said UBS, and it could extend the life cycle of mobile casual gaming in China, based on the experience of Korean hit game Everybody’s Marble, which is tailored for the networking application KakaoTalk.

“The combination of easy-to-play mobile games and social elements creates an interactive environment that we believe could drive the activity and stickiness of gamers, supporting a sustained revenue stream,” UBS said.

It believes that Tencent is well positioned to maintain momentum in mobile casual games, too, given the dominance of its leading social networking platforms, such as QQ and WeChat.

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