Author丨Xiao Li Flying Knife

Picture丨Picture Worm Creative, Oriental IC, Internet

Source丨Market Value Observation (ID: shizhiguancha)

Recently, "Black Myth: Wukong" has become the absolute top stream in the game circle, so that industry index funds led by game ETFs (159869) have also received high attention from the capital market. The success of this game not only demonstrates the rise of China's game industry in the global market, but also provides a new direction and sample for the development of the industry.

01

An inspiring victory

China's first triple-A masterpiece "Black Myth: Wukong" became popular all over the world as soon as it was launched. In just two weeks, global sales exceeded 18 million sets, with sales exceeding 6 billion yuan. Some analysts even predict that the game's final sales could be as high as more than 15 billion yuan if potential benefits such as future updates, paid content and IP licensing are taken into account.

This marks another major leap forward for domestic games on the international stage, and also highlights the commercial value of traditional Chinese culture and IP.

The game is based on "Journey to the West", with 81 levels and corresponding monster characters, which players can easily participate in without additional learning, expanding the game's audience base.

In addition, the game fully integrates traditional Chinese cultural elements in terms of scene design and music. Among them, 36 scenes are inspired by famous domestic scenic spots, and 27 of them are filmed in Shanxi, including ancient buildings, statues and murals, which make players around the world feel the cultural shock.

Most importantly, the character of Goku is well-known and deeply rooted in China, and his influence has also played a key role in the success of the game.

In addition, the popularity of the game has also provided a new direction for the development of China's game industry.

On the one hand, more domestic game manufacturers should pay attention to the dissemination and penetration of traditional Chinese culture. Games are no longer simple entertainment tools, but also cultural carriers behind them, which also meet the deep-seated needs of players' inner spiritual world.

In fact, Journey to the West and Wukong have always been important IPs in China's cultural industry, and they are also the most lucrative IPs in the global mobile game market. According to Newzoo data, from January 2015 to March 2021, the net income of games derived from Journey to the West IP reached more than 35 billion yuan, which was more than twice the net income of Marvel's IP games, which mainly came from the contribution of two blockbuster mobile games, "Fantasy Westward Journey" and "Westward Journey".

In addition, the explosion of "Black Myth: Wukong" this time will drive game manufacturers to grab a bonanza from China's traditional big IP.

On the other hand, this also implies that domestic game manufacturers still have a new path to avoid involution and seek growth - to successfully build IP through stand-alone games, and then achieve long-term income through networking.

Previously, single-player games were not welcomed by manufacturers because of the short product life cycle and insufficient profitability. However, Black Myth Games has refreshed the market perception, and it is expected that online games with the same IP will be developed in the future to obtain more stable and sustainable income.

This path to monetization has been successful in history. For example, Blizzard Entertainment's "Warcraft" is a stand-alone game, which has been very popular since its release, attracting a large number of loyal fans around the world. Later, the company took the opportunity to launch the online game "World of Warcraft", which contributed more than $10 billion.

In short, the success of "Black Myth: Wukong" is significant and far-reaching.

02

Going to sea is the litmus test

The black myth has swept the world, which is a victory for China's domestic games, but it does not change the pressure and challenges that China's game industry is currently facing.

In the past many years, with the continuous penetration and popularization of the Internet and the rapid expansion of the scale of game users, China's game market has experienced a golden stage of rapid growth. During this period, super bull stocks represented by Tencent and NetEase were born.

With the passage of time, China's game industry as a whole will shift from incremental opportunities to stock games. In the first half of 2024, the number of game users in China will be 674 million, with a year-on-year growth rate of only 0.88%, which is lower than the growth rate of 1.26% in the whole of 2023. And with the negative growth of the Chinese population and the evolution of the aging degree, the penetration rate of game users may be close to peaking.

Without the blessing of user growth, policy and regulatory pressure and consumption differentiation, the rapid growth of China's game industry may have become a thing of the past - from 2020 to 2023, the compound annual growth rate of China's game industry market size is only 2.8%.

▲The size of China's mobile game market

Source: China Merchants Bank Research Institute

So, where is the path for Chinese game manufacturers?

Going to sea is actually a must-answer question.

According to gamma data, the total revenue scale of the global video game market will once again exceed one trillion yuan in 2023, reaching 1.18 trillion yuan. Among them, the size of China's game market is 303 billion yuan, and the overseas market is 887 billion yuan. From the perspective of total volume, Chinese manufacturers have great potential to go overseas to seek business increment.

Tencent, NetEase, miHoYo and other major manufacturers have set a precedent for going overseas. In the second quarter of fiscal 2024, Tencent's international game revenue was 13.9 billion yuan, a year-on-year increase of 9%, accounting for nearly 30% of the game business.

Unlike Tencent, which adheres to the large and comprehensive model of "self-development + acquisition + issuance", miHoYo adopts the vertical and deep overseas model of "IP + explosive models". In 2023, "Honkai: Star Dome Railway" belongs to miHoYo's classic IP "Honkai" series, which combines traditional Chinese culture and science fiction elements, and is well received by players, killing all sides in overseas markets, contributing nearly 40% of miHoYo's overseas revenue (overseas revenue exceeds $1 billion).

NetEase, as the leading domestic game manufacturer, seems to be in decline, falling from 3rd to 7th in the ranking of Chinese mobile game publishers in 2023, surpassed by Sanqi Mutual Entertainment, Lilith and other manufacturers. "Wilderness Action" is NetEase's flagship product overseas, which is very popular in the Japan market, but it cannot compete with global products such as Tencent's "PUBG MOBILE" and miHoYo's "Genshin Impact".

In addition to the leading manufacturers, China's small and medium-sized tourism enterprises are also accelerating their expansion into the sea.

In the first half of 2024, among the 21 A-share game companies, Century Huatong's overseas revenue ranked first, reaching 5 billion yuan, a year-on-year increase of 115%. Sanqi Mutual Entertainment ranked second, with 2.9 billion yuan, a year-on-year decrease of more than 4%; Shenzhou Taiyue ranked third, with 2.55 billion yuan, a year-on-year increase of 22.8%.

In addition, there are 8 A-share tour companies with overseas revenue accounting for more than 50%, including Kunlun Wanwei, Tom Cat, Baotong Technology, Youzu Network, Xinghui Entertainment, Century Huatong, etc.

It can be seen that Chinese games have achieved certain results in going overseas, but they are far from reaching the level and height of global leaders, and they can continue to seize overseas markets and seek business increments in the future.

In fact, there is still a way for China's local game companies to improve their performance growth. Large manufacturers can build their own game distribution platforms, which can not only effectively control distribution channels, but also better integrate content to maximize profits. You must know that the global game distribution market is monopolized by a few platforms such as Steam and PlayStation, which have siphoned off 30% of sales revenue from game manufacturers and made money for many years.

This has also been a successful case, Blizzard's Battle.net has integrated a number of its own classic games, reduced its dependence on external platforms, and improved its profitability. Of course, self-built platforms need to be continuously invested and operated to have a chance to break the current monopoly situation.

03

There is no reason to remain pessimistic

In the past few years, the capital market has been afraid of relevant regulatory policies, which has also caused the valuation level of the whole industry to drop a lot. One is the "Draft Measures for the Administration of Online Games (Draft for Comments)" released by the National Edition Administration in December 2023, which once caused panic in the capital market, and then quickly corrected the deviation. The other is the game version policy, which has a self-evident impact on the game industry.

In March 2018, the approval of game licenses was suspended for the first time, causing the number of editions to plummet by 78% to 2,105 that year. For the next four years, the number of editions continued to decline, reaching only 464 in 2022. However, from 2023 onwards, the issuance of edition numbers will pick up, reaching 977. In the first half of 2024, there will be 689 edition numbers, a year-on-year increase of 26%.

The more and more regular release of game versions has stabilized market expectations and confidence, and to a certain extent, it also represents a change in the direction of regulatory policies.

More directly, in August this year, the State Council issued the "Opinions on Promoting the High-quality Development of Service Consumption", and the term online games was clearly mentioned for the first time and as an important part of improving the quality of cultural and entertainment consumption.

This measure not only marks a significant improvement in the status of online games at the national policy level, but also indicates that the game industry will not be shackled by policies in the foreseeable future.

In addition to the policy shift, the fundamentals of the A-share game sector will also bottom out. Previously, the market was worried that in addition to Tencent, NetEase, and miHoYo, the market share of other game companies would be squeezed, and their performance expectations were pessimistic.

In fact, since 2024, many small and medium-sized travel companies have many popular products, and their market share has increased.

In addition, with the arrival of the product issuance cycle in the second half of the year, the performance of A-share tour companies is expected to improve quarter by quarter. For example, Kaiying Network's "Slime" and "Douluo Continent", Shenzhou Taiyue's "Codename DL", and Gigabit's "Asking Sword Immortality" and "Legend of the Sword" will all be launched one after another.

In addition, since 2024, the A-share gaming sector has fallen by 25%, retraced by more than 50% from the peak in 2023, and the latest valuation has fallen to 25.9 times, hitting a multi-year low level. Among them, the corresponding valuations of major companies in 2024 are only between 10-13 times.

▲ The price-earnings ratio trend chart of the game sector

Source: Wind

Coupled with potential benefits such as improved performance and policy shifts, the gaming sector has a high investment value for money. At the moment, the Layout Game Index Foundation is a good choice. For example, the game ETF (159869) has a large scale and good liquidity, and among the top ten heavy stocks, there are well-known game manufacturers such as Kunlun Wanwei, Kaiying Network, Century Huatong, Sanqi Mutual Entertainment, Shenzhou Taiyue, and Giant Network, and the overseas market development is impressive, and the future growth potential is good.

In short, there is no reason to continue to be pessimistic, and it is worth continuing to pay attention to the opportunity to lay out high-quality game leaders or overall sectors with low valuations, and the winning rate and odds are not bad.

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