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3 Chinese Gaming Stocks with High Upside Potential

With restrictions on video game spending reduced these stocks are set to gain a few points.

Vikram Barhat 15 May, 2024 | 4:58AM
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Shanghai gaming

The Chinese video gaming industry has gotten a major boost with regulators recently ending the restriction on player spending. Further, China’s National Press and Publication Administration, the nation’s top gaming regulator, has also approved over 100 new domestic games in addition to 40 imported ones.

China’s online gaming market is booming, fueled by a burgeoning middle class and widespread smartphone adoption. As a dominant force in the global gaming industry, Chinese companies contribute 47% of mobile games revenue worldwide. The Asian nation’s gaming industry is projected to grow from US$45.5 billion in 2022 to over US$57 billion by 2027, attracting a staggering 730 million gamers.

Investors interested in China’s burgeoning mobile gaming sector should consider the following stocks. These companies are poised to gain from accelerated market growth in 2024, driven by new game releases and a more relaxed regulatory environment. 

Tencent TCEHY, the Chinese internet titan, holds the title of the world's leading video game provider. Among its impressive portfolio are top-grossing mobile games such as Honor of Kings, Cross Fire, Golden Spatula, and PUBG Mobile. Additionally, Tencent owns and operates China's premier social media super app, WeChat, a household name domestically. WeChat connects millions of users who converge on the app for social networking, gaming and video streaming, and use its food delivery and transportation services.

In the last decade, Tencent has capitalized on the industry's pivot towards mobile gaming. “To date, games remain Tencent's primary monetization model,” says a Morningstar equity report, and estimates more than 40% of the group's operating income to come from this segment.

The Chinese tech behemoth is expected to continue to leverage its enviable user data and financial capital to craft innovative, high-quality, and long-cycle games with a mobile-first approach, the report adds.

Given WeChat's large and engaged user community, advertisers will continue to flock to its platforms to reach Chinese consumers. “We see a tremendous amount of untapped value in WeChat as it continues to increase monetization through advertising and acts as a major gateway for other internet services (payment, delivery, and insurance) looking to access the 1.2 billion-plus WeChat users,” says Su, who puts the stock’s fair value at US$90.

 

A formidable player in the Chinese gaming market, NetEase NTES is a leading online services provider whose offerings include online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce.
The company creates and operates several popular Chinese PC and mobile games, collaborating with renowned global gaming names such as Blizzard Entertainment and Mojang (a Microsoft subsidiary).

The firm “has now become the second-largest mobile game company in the world,” says a Morningstar equity report, pointing out that it owns one of the most well-known multiplayer franchises in China—Fantasy Westward Journey.

In the past decade, NetEase has embraced the trend towards mobile gaming, prioritizing the development of innovative, high-quality games with a mobile-first strategy.

The gaming giant’s impressive product portfolio includes iconic titles such as Onmyoji, Knives Out, and Identity V. “Every year, the company publishes dozens of games across almost every genre and gameplay,” notes Su who pegs the stock’s fair value at US$158 and forecasts a five-year total revenue CAGR of 11%.

Furthermore, NetEase has collaborated with global gaming juggernauts such as Blizzard, Marvel, and Microsoft. The partnership has allowed NetEase to release their popular games including Diablo, Harry Potter, and Lord of the Rings in mainland China, “which has diversified the genres of NetEase's online games offering,” says Su.

 

Chinese online entertainment giant Bilibili BILI is best known for its video-sharing site that resembles YouTube. Over the years, the firm has expanded its content offerings that have attracted Chinese users beyond the Gen Z cohort. Advertising, gaming, live streaming, value-added services, and e-commerce remain the biggest revenue generators.

The social media site generates more than 17.1% of its revenue from Chinese domestic gaming. “In addition to its core video platform, Bilibili offers other services such as live streaming, mobile games, and e-commerce,” says a Morningstar equity report. “Gaming contributes to a sizable portion of revenue for the company.”

However, all of the firm's mobile games operate on a stand-alone basis and outside of the core Bilibili app, limiting its network effect, the report adds. For that reason, the firm's 20 million monthly active gamers are minimal compared with moaty peers Tencent and NetEase.

While the company’s gaming segment operates in a highly competitive environment, it attracts a wider base of users, potentially increasing the platform’s appeal to advertisers, the report adds.

The advertising business (part of its YouTube-like video-sharing website) is the crown jewel of its assets and is pivotal to the company’s long-term success. “Bilibili’s video-sharing site has a superior business model compared with most other video streaming companies,” asserts Morningstar equity analyst Ivan Su, who puts the stock’s fair value at US$34, and forecasts monthly active users to grow by 3% per year, reaching 360 million by 2027.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bilibili Inc ADR15.29 USD-0.97Rating
NetEase Inc ADR96.46 USD0.92Rating
Tencent Holdings Ltd ADR47.46 USD0.21Rating

About Author

Vikram Barhat

Vikram Barhat  is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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