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China Information Technology 2 August 2016
China Internet Sector
ChinaJoy wrap: online games, long may they reign
Positive outlook on mobile game revenue growth unchanged; expect
recent regulation to accelerate mobile game industry consolidation
Tencent and NetEase already dominate respective mobile hard-core
genres in China; both have strong mobile game pipelines in 2H16 John Choi
(852) 2773 8730
Top picks in the China Internet sector: Alibaba and Tencent john.choi@hk.daiwacm.com
Alex Liu
(852) 2848 4976
alex.liu@hk.daiwacm.com
What's new: We attended ChinaJoy, Asia’s largest digital entertainment fair
and World Mobile Game Conference (WMGC), in Shanghai on 29-31 July. We
are more optimistic on large online game players including Tencent (700 HK,
HKD184.50, Buy [1]) and NetEase (NTES US, USD202.71, Outperform [2])
after the event. We expect both to meet, if not beat, our and the consensus
mobile game revenue growth forecasts in their upcoming 2Q16 results.
What's the impact: Big players getting bigger. We expect mobile game
market consolidation to continue, ultimately benefiting the large players like
Tencent and NetEase. Specifically, Tencent plans to launch fewer mobile
game titles but with a higher quality to cover the majority of China’s mobile
game population. Its leadership in the mobile multiplayer online battle arena
(MOBA), casual, and first person shooter (FPS) genres is largely intact, in our
view. Separately, we believe NetEase is in a league of its own in terms of the
mobile role playing game (RPG) genre in China, and is ready to expand into
new genres including Dance and Card & Action. Its PC licence game
portfolio, including the recently launched Overwatch and the upcoming WoW
7.0, also look like they would offer good monetisation potential.
Tightened regulation favours established players. The State Administration
of Press, Publication, Radio, Film and Television’s (国家广电总局) (SARFT)
recent requirement for mobile game developers to submit games for review
before publishing will greatly increase compliance costs, lengthen the
production development cycle and disadvantage small developers. We expect
the regulation to lead to an acceleration of mobile game industry consolidation
in the next few quarters.
Pan-entertainment taking shape. The leading online game companies
are all talking about exploiting the value of popular intellectual property (IP)
via movies/TV series/literature, etc. In our view, the few players that have
control over upstream content production to downstream content
distribution will grab the most value from the IP monetisation process. We
see Tencent as the best positioned on this front.
What we recommend: Within the China online game sector, we believe
NetEase and Tencent will continue to harvest the market and gain share at
the cost of the smaller players. Our top picks in the China Internet Sector
are Tencent and Alibaba (BABA US, USD84.34, Buy [1]). Our long-term
positive secular growth thesis on Alibaba still stands. For Baidu, we expect
a muted short-term performance given the low visibility on its business
recovery and lack of share-price catalysts.
How we differ: We are more confident than the street on the secular growth
potential for ecommerce and online game players.
See important disclosures, including any required research certifications, beginning on page 21
China Internet Sector: 2 August 2016
Internet sector valuations (as of 1 August 2016)
Market price Market cap PER (x) P/S (x) EV/EBITDA (x) ROE %
Ticker Short Name Rating (local curr') (USDm) FY1E FY2E FY3E FY1E FY2E FY3E FY1E FY2E FY3E FY1E
China Internet
700 HK Equity TENCENT Buy 184.50 221,109 32.2 26.3 21.7 10.2 8.3 7.0 20.1 15.9 12.7 37.7
BIDU US Equity BAIDU INC-SP ADR Hold 163.23 57,180 34.9 21.7 15.5 5.2 4.3 3.6 24.2 14.9 9.6 12.2
NTES US Equity NETEASE INC-ADR Outperform 202.71 26,652 15.8 13.9 12.3 4.8 4.0 3.4 10.8 8.9 7.3 33.5
CTRP US Equity CTRIP.COM-ADR Buy 43.09 19,508 149.7 38.8 23.2 6.6 5.3 4.3 n.a. 37.1 18.0 8.5
WB US Equity WEIBO CORP-ADR Non-rated 34.04 7,241 59.9 36.9 23.9 10.9 8.3 6.0 52.0 31.3 16.7 7.4
SINA US Equity SINA CORP Non-rated 54.73 3,823 66.4 37.5 23.8 3.9 3.4 2.9 22.7 14.7 9.3 2.2
YY US Equity YY INC-ADR Non-rated 39.13 2,150 13.6 11.3 n.a. 1.9 1.3 1.1 10.3 8.6 n.a. 34.3
SFUN US Equity SOUFUN HOLDI-ADR Non-rated 5.06 2,405 n.a. 46.0 18.2 1.9 1.5 1.1 n.a. 28.5 15.1 (23.9)
ATHM US Equity AUTOHOME INC-ADR Non-rated 22.36 2,564 13.9 11.5 9.5 2.2 1.7 1.1 11.4 8.3 7.3 23.7
EDU US Equity NEW ORIENTAL-ADR Non-rated 43.09 6,762 23.9 19.2 15.5 3.9 3.4 2.9 17.2 13.8 11.4 17.1
BITA US Equity BITAUTO HOLD-ADR Non-rated 28.00 1,690 22.2 14.5 10.5 1.9 2.8 2.3 13.2 8.6 6.5 (7.3)
WUBA US Equity 58.COM-ADR Non-rated 51.76 7,328 n.a. 34.2 22.2 5.4 4.2 3.0 58.2 21.0 12.5 (19.3)
QUNR US Equity QUNAR CAYMAN-ADR Non-rated 30.00 4,343 n.a. 54.6 23.9 5.4 4.0 2.9 n.a. 84.9 29.6 n.a.
XRS US Equity TAL EDUCATIO-ADR Non-rated 58.83 4,758 41.6 27.9 20.5 4.9 3.7 2.8 31.2 20.2 13.8 21.7
SOHU US Equity SOHU.COM INC Non-rated 37.91 1,466 n.a. n.a. n.a. 0.8 0.7 0.7 6.2 2.5 2.1 (3.2)
Average 43.1 28.2 18.5 4.7 3.8 3.0 23.1 21.3 12.3 10.3
China E-commerce
BABA US Equity ALIBABA GRP-ADR* Buy 84.32 206,626 33.6 26.6 21.0 13.0 9.1 7.2 24.0 18.7 13.7 24.6
JD US Equity JD.COM INC-ADR* Buy 21.84 29,948 n.a. 42.4 19.8 0.8 0.6 0.5 n.a. 46.0 15.2 -
VIPS US Equity VIPSHOP HOLDINGS* Buy 14.33 8,257 22.1 17.8 13.7 1.0 0.8 0.7 15.4 10.0 6.9 58.8
JMEI US EQUITY JUMEI INTERNATIO Non-rated 4.08 598 10.1 6.2 5.5 0.4 0.3 0.2 2.8 1.6 1.4 3.4
Average 21.9 23.3 15.0 3.8 2.7 2.2 14.0 19.1 7.8 21.7
Global Internet
AAPL US Equity APPLE INC Non-rated 106.05 571,444 12.8 11.8 10.7 2.6 2.5 2.4 6.0 5.8 5.5 37.9
GOOG US Equity ALPHABET INC-C Non-rated 772.88 539,559 22.8 19.3 16.6 6.9 6.5 5.6 12.8 11.0 9.5 15.0
FB US Equity FACEBOOK INC-A Non-rated 124.31 356,935 31.7 24.5 19.8 11.3 9.8 7.3 19.8 14.8 11.7 13.4
AMZN US Equity AMAZON.COM INC Non-rated 767.74 363,965 71.2 47.4 34.7 2.4 2.2 1.8 22.9 17.0 13.4 13.6
PCLN US Equity PRICELINE GROUP Non-rated 1,356.08 67,315 20.3 17.3 15.0 6.2 5.5 4.8 16.7 14.3 12.4 29.3
EBAY US Equity EBAY INC Non-rated 31.25 35,282 16.6 15.1 13.7 3.9 3.8 3.6 10.4 9.9 9.3 14.7
YHOO US Equity YAHOO! INC Non-rated 38.80 36,857 80.0 70.3 65.7 10.4 10.1 10.0 39.8 35.9 34.4 (15.8)
TWTR US Equity TWITTER INC Non-rated 16.64 11,777 33.3 29.5 23.0 4.4 4.1 3.6 14.0 11.9 10.0 (9.3)
NFLX US Equity NETFLIX INC Non-rated 94.37 40,459 173.2 79.7 45.3 4.1 3.8 3.0 81.3 42.2 25.9 6.3
EXPE US Equity EXPEDIA INC Non-rated 117.37 17,572 23.8 17.8 14.7 1.9 1.8 1.5 12.0 9.6 8.1 5.7
TRIP US Equity TRIPADVISOR INC Non-rated 70.45 10,265 41.6 31.6 24.3 6.3 5.6 4.8 23.0 18.1 14.5 12.3
LNKD US Equity LINKEDIN CORP-A Non-rated 193.09 26,014 56.0 44.7 35.5 6.7 5.8 4.9 23.8 19.2 15.5 (4.0)
035720 KS Equity KAKAO CORP Buy 91,000.00 5,540 21.5 21.0 19.1 4.9 3.7 3.3 14.5 11.6 10.2 10.2
4755 JP Equity RAKUTEN INC Non-rated 1,184.00 16,627 25.7 19.9 16.1 2.1 0.0 0.0 2.3 1.9 1.6 7.8
4689 JP Equity YAHOO JAPAN CORP Non-rated 446.00 24,975 19.0 17.1 14.9 2.9 3.3 3.1 9.3 8.4 7.6 22.6
Average 43.3 31.1 24.6 5.1 4.6 4.0 20.6 15.4 12.6 10.6
Source: Bloomberg, *Daiwa forecasts
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China Internet Sector: 2 August 2016
Table of contents
Tencent: highlights from ChinaJoy ........................................................................ 4
Mobile games: focusing on premium titles .........................................................................4
PC games: pipeline less exciting than mobile games .........................................................8
NetEase: highlights from ChinaJoy .......................................................................12
Mobile games: role playing game king .............................................................................12
PC Games: licensed titles are the bright spot ..................................................................14
Industry themes: key highlights from ChinaJoy...................................................16
Recommendation and risks ....................................................................................18
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China Internet Sector: 2 August 2016
Tencent: highlights from ChinaJoy
Long may Tencent reign
Tencent’s mobile pipeline in 2H16 looks strong to us
Tencent is taking an open stance on sourcing and operating mobile games
developed by other smaller content providers (CPs)
Tencent’s PC game pipeline looks less exciting than its mobile game pipeline;
existing PC titles likely to be main revenue contributors heading into 2H16
Pan-entertainment strategy and eSport initiatives help expand game life-cycle
Mobile games: focusing on premium titles
Focus on game quality Tencent announced its “Premium Game 3.0 (精品游戏 3.0)” strategy in March 2016, which
and life cycle emphasises individual game quality over number of game launches. We saw fewer newly
launched mobile games in 1H16 vs 2H15 (1H16:13 games, 2H15:19 games), but a good
performance (implying a higher success rate) from these titles. For example, Tencent’s
MOBA genre mobile game WeHero (王者荣耀), while being a top-5 game in terms of gross
revenue over the past few months, has gradually rolled out an eSports initiative for
WeHero that further enhances core gamer engagement.
Tencent’s management has said the company plans to launch c.15 new games in 2H16, a
similar pace to 1H16.
We selected a handful of mobile games in the pipeline that we believe are worth watching:
Contra Mobile (魂斗罗)
Strong IP; expect good Launch date: closed-beta testing to start from August 2016; scheduled to launch in
performance; limited 4Q16
contribution in 2H16 Characteristics: action genre; licensed from KONAMI
Our take: Our test play showed good visual quality and speed control for this title. We
believe that given the strong popularity of the Contra game among post-80&90 generations
in China, the mobile version of Contra should be able to attract a fairly large gamer
population after launch. Nevertheless, we expect an immaterial revenue contribution from
this game in 2H16. 1
Tencent: screenshot of Contra test run Tencent: screenshot of Contra test run
Source: Company, Daiwa compiled Source: Company, Daiwa compiled
1
The authors would like to thank Yishuo Liu for her valuable contribution to this report.
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China Internet Sector: 2 August 2016
JX3: pocket version (剑网 3 指尖江湖)
Good IP; another mobile Launch date: closed-beta testing to start from August 2016; expected to launch in 4Q16
game adapted from the Characteristics: ARPG genre; licensed from Kingsoft; the story background of the
popular PC version of mobile version is directly based on the JX3 PC version
the JX Series
Our take: JX3: the pocket version is Kingsoft’s second mobile game title derived from the
JX series PC game. The first case of such adaptation, JXQY (剑侠情缘手游版), which was
also developed by Kingsoft and operated by Tencent, has been getting good traction since
being launched in 2Q16 and is currently ranked within the top-10 games on China’s iOS
grossing chart. We expect a good performance from this title after launch.
Tencent: screenshot of JX3: pocket version test run
Source: Company, Daiwa compiled
The World of Legend (传奇世界手游)
Good IP; another mobile Launch date: closed-beta testing to start from August 2016; estimated to launch in
title derived from the 4Q16
popular Legend PC Characteristics: MMORPG genre; licensed from Shanda Game; the story background
version of the mobile version is directly based on the Legend PC version
Our take: similar to the JX series mobile game, The World of Legend is Shanda’s second
mobile game title derived from the Legend PC game. The first case of such adaptation,
RXCQ (热血传奇手游), which was also developed by Shanda Game and operated by
Tencent, has been getting good traction since being launched in 1Q16 and is currently
ranked within the top-20 games on China’s iOS grossing chart. We expect a good
performance from this title after launch.
Tencent: screenshot of World of Legend test run Tencent: screenshot of World of Legend test run
Source: Company, Daiwa compiled Source: Company, Daiwa compiled
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China Internet Sector: 2 August 2016
MHZX (梦幻诛仙)
Good IP; mobile title Launch date: scheduled to launch in 4Q16
derived from the popular Characteristics: turn-based RPG genre; licensed from Perfect World; the story
online novel Zhuxian background of the mobile version is directly based on the Zhuxian PC version
Our take: We note that MHZX is based on the Zhuxian PC game series (developed by
Perfect World), which was ultimately derived from the popular online novel Zhuxian. We
see a big existing fan base for this game and believe the timing of the launch is good given
that the TV drama, Zhuxian (诛仙青云志), is currently on air and can be watched via
Tencent Video. On the other hand, competition for this game is likely to be fierce given that
Perfect World is also planning to launch a mobile game based on the same IP, called
Zhuxian Mobile (诛仙手游), in early August 2016.
Other mobile game titles in the pipeline:
Xianjian OL Mobile (仙剑 OL 手游 )
MMORPG genre
In-house-developed title based on the popular Xianjian PC game series
Tencent: screenshot of Xianjian OL Mobile test run
Source: Company, Daiwa compiled
Crazy Arcade (泡泡堂)
Casual game
Licensed from Nexon; based on the popular Crazy Arcade PC version (operated by
Shanda Game)
Unlimited testing expected to start November 2016
Dragon Nest (龙之谷)
ARPG genre
Licensed title from Shanda Game; based on the Dragon Nest PC version
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China Internet Sector: 2 August 2016
Tencent: screenshot of Dragon Nest test run
Source: Company, Daiwa compiled
DNF Mobile (地下城与勇士手游)
One of the most MMORPG genre
anticipated mobile Adapted from the popular DNF PC version (one of the key PC game revenue
games for 2H16 contributors for Tencent right now)
Expected to launch in 2H16
TLBB Mobile (天龙八部手游)
MMORPG genre
Adapted from the popular TLBB PC version (developed and operated by Changyou)
Expected to launch in 1Q17
Jueji (爵迹手游)
Mobile game derived from the popular novel written by Guo Jingming
Expected to launch in 1Q17
YLZT (御龙在天)
MMORPG genre
In-house developed by Tencent
Expected to start unlimited testing in August 2016
Tencent: screenshot of YLZT test run
Source: Company, Daiwa compiled
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China Internet Sector: 2 August 2016
Hello Fishing (捕鱼来了)
Casual game
Licensed from Guangxi Ligang
Efunfun (弹弹堂)
Casual game
Adapted from the popular web-game; to be published together with The 5th Avenue
Tencent: mobile game pipeline (as of August 2016)
Game Title Launch Date Game Genre Developer
Naruto Mobile (火影忍者) 1Q16 Action Licensed
Timi Run Everyday 3D (天天酷跑 3D) 1Q16 Action In-house
Tian Tian Qiao Pai (天天桥牌) 1Q16 Card In-house
Tencent Wei Qi (腾讯围棋) 1Q16 Board & card In-house
Tencent Qiao Pai (腾讯桥牌) 1Q16 Board & card In-house
Blade & Soul Mobile (剑灵) 1Q16 Card Licensed
Tian Mo Huan Xiang (天魔幻想) 1Q16 RPG In-house
Dragon Ball Z (龙珠激斗) 2Q16 RPG Licensed
Zheng Tu (征途) 2Q16 RPG Licensed
Jian Xia Qing Yuan (剑侠情缘) 2Q16 MMORPG Licensed
Carrot Fnatasy 3 (保卫萝卜 3) 2Q16 Tower Defense Licensed
Asura (全民斗战神) 2Q16 ARPG In-house
Puzzle and Dragon (智龙迷城) 2Q16 RPG Licensed
The World of Legend (传奇世界) 2H16E MMORPG Licensed
Yu Long Zai Tian (御龙在天) 2H16E MMORPG In-house
Hello Fishing (捕鱼来了) 2H16E Casual Licensed
Meng Huan Zhu Xian (梦幻诛仙) 2H16E Turn-based RPG Licensed
Contra (魂斗罗) 2H16E Action In-house
Dragon Nest (龙之谷) 2H16E ARPG Licensed
Xian Jian online (仙剑 online) 2H16E MMORPG In-house
JX3 (剑网 3) 2H16E MMORPG Licensed
DDTank (弹弹堂) 2H16E Shooting Licensed
Crazy Arcade (泡泡堂) 2H16E Casual Licensed
DnF Mobile (地下城与勇士) 2H16E Action Licensed
TLBB (天龙八部) 1Q17E MMORPG Licensed
Jue Ji (爵迹) 1Q17E MMORPG In-house
Huan Le Pin San Zhang (欢乐拼三张) 2Q16E Board & card In-house
Ensemble Stars (偶像梦幻祭) 2Q16E EDU Licensed
Infinity Blade Saga (无尽之剑命运) 2Q16E RPG Licensed
Tian Tian Huan Ling (天天幻灵) 3Q16E Card In-house
Infinity Blade Saga (无尽之剑 - 命运) TBC ARPG In-house
6L 3D (六龙争霸 3D) TBC Strategy Licensed
FIFA Online Mobile (足球在线) TBC Strategy Licensed
Xun Long Zhan Ji (驯龙战机) TBC Shooting Licensed
Zhu Gong Ting Zhu (主公挺住) TBC RPG Licensed
Stoneage (石器时代) TBC RPG Licensed
Source: Company, Daiwa compiled
PC games: pipeline less exciting than mobile games
We generally feel less excited about Tencent’s PC game pipeline compared to its mobile
game pipeline. For now, we expect Tencent’s top-3 games – League of Legends, Cross
Fire and DNF – to continue as the main PC revenue pillars heading into 2H16.
We are not particularly concerned about the competition from NetEase’s Overwatch
as: 1) the gamer profile and game genre are different, and 2) Overwatch’s pay-up-front
model reduces adoption among relatively low income players. We do believe Overwatch is
likely to grab existing Tencent gamers; however, we would consider this the natural
maturing of the game’s life cycle. As the following table shows, in June 2016 (first full
month launch of Overwatch), Tencent’s games still occupy the top-3 positions in terms of
net cafe game usage.
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China Internet Sector: 2 August 2016
China: PC game ranking in terms of net cafe usage, June 2016
Tencent’s core PC titles Ranking Game title Genre Company In-house/ No. of times it is played in
Licensed Internet cafes (indexed)
still retain high
1 League of Legends (英雄联盟) MOBA Tencent In-house 100.0
engagement despite the
2 Cross Fire (穿越火线) FPS Tencent Licensed 20.5
sharp rise of Overwatch 3 Dungeon and Fighter (地下城与勇士) Fighting Tencent Licensed 14.8
in June 2016 4 QQ Speed (QQ 飞车) REC Tencent In-house 3.9
5 Ni Zhan (逆战) FPS Tencent In-house 3.4
6 OverWatch (守望先锋) FPS NetEase Licensed 2.4
7 QQ Dance (QQ 炫舞) MUG Tencent Co-published 1.5
8 NBA2KOL SPG Tencent Co-developed 1.1
9 Dota2 MOBA Perfect World Licensed 0.9
10 Dream of Three Ancient Kingdoms2 (梦三国 2) MOBA Electronic Soul In-house 0.8
11 World of Warcraft (魔兽世界) MMORPG NetEase Licensed 0.7
12 Call of Duty Online (使命召唤 Online) FPS Tencent Licensed 0.6
13 HearthStone (炉石传说) CARD NetEase Licensed 0.6
14 天涯明月刀 MMORPG Tencent In-house 0.5
15 Blade & Soul (剑灵) MMORPG Tencent Licensed 0.5
16 FIFA Online3 SPG Tencent Licensed 0.5
17 World of Tanks (坦克世界) TPS Kongzhong Licensed 0.4
18 Fantasy of West Journey (梦幻西游) MMORPG NetEase In-house 0.4
19 FreeStyle (街头篮球) SPG T2 Entertainment Licensed 0.4
20 Counter-Strike Online (反恐精英 Online) FPS Tiancity Licensed 0.3
Source: Shunwang
We selected a handful of Tencent’s PC games in the pipeline that we believe are worth
watching:
MapleStory2 (冒险岛 2)
Large fan base in China Launch date: closed-beta testing started on 28 July
Characteristics: RPG & sandbox genre; licensed from Nexon
Our take: MapleStory2 is an upgraded version of the popular MapleStory PC version. The
game allows players to explore the virtual world and is less intense compared to some
other MMORPG titles. We note that many Mainland players are already playing on the
Korean servers, pointing to the quality of the game. We are optimistic about the game’s
performance after its official launch in China, expected in 2H16.
Need for Speed OL(极品飞车 OL)
A proven global title Launch date: closed-beta testing from 17 August
Characteristics: car-chase genre; licensed from Electronic Arts (EA)
Our take: Need for Speed is a renowned title globally. We believe the game will further
enhance Tencent’s advanced casual PC games portfolio, which includes FIFA Online
(licensed from EA) and Call of Duty OL (licensed from Blizzard).
Transformer OL (变形金刚 OL)
Globally recognised IP; Launch date: closed-beta testing to start in August 2016
executing a pan- Characteristics: FPS genre; developed in-house by Tencent
entertainment strategy
Our take: We view this game as a part of Tencent’s pan-entertainment strategy, whereby
the company, through investing or developing in-house, is looking to further exploit the
value of its popular IP via various types of media formats, including movies, games, music,
and other derivative products. The game will be released before the premier of
Transformer 5 (expected in 2H17).
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China Internet Sector: 2 August 2016
Tencent: screenshot of a test run for Transformer online
Source: Company, Daiwa compiled
Other PC game titles in the pipeline:
Zero (代号零)
Tencent’s latest in-house developed turn-based game
Still under technical testing
Master*Master (全职大师)
Action genre advanced casual game
Licensed from NCsoft
Currently under closed-beta testing
Iron Knight (刀锋铁骑)
Real-time RPG genre
Developed in-house by Tencent
Currently going through second round of closed-beta testing
Tencent: screenshot of a test run of Iron Knight
Source: Company, Daiwa compiled
10China Internet Sector: 2 August 2016
Tencent: PC game pipeline (as at 1 August 2016)
Game Title Launch date Genre Developer Testing statues
Advanced Casual Games (ACG)
Call of Duty Online (使命召唤) 1Q15 High-end First-Person Shooter (FPS) Licensed Open-beta testing
Orc Must Die (兽人必须死) 1Q15 3D Multiplayer Online Battle Arena (MOBA) Licensed Open-beta testing
SMITE (神之浩劫) 2Q16 3D MOBA Licensed Open-beta testing
War Thunder (战争雷霆) 2Q16 Third-Person Shooter (TPS) Licensed Open-beta testing
Need for Speed (极品飞车) TBC Car chase action game Licensed
Master x Master (全职大师) TBC 3D MOBA Licensed
Core Fight (炫斗之王) TBC 2D side-scrolling fighting game In-house
Metro Conflict: Presto (重火力) TBC Science fiction theme FPS Licensed
Three Kingdoms (霸三国 Online) TBC Real Time Strategy In-house
HON (超神英雄) TBC 3D MOBA Licensed
Massively Multiplayer Online Games (MMOG)
Moonlight Blade (天涯明月刀) 4Q15 3D martial arts style MMORPG In-house Open-beta testing
Monster Hunter Online (怪物猎人 OL) 4Q15 3D fighting Massively Multiplayer Online Action Gams (MMOACT) Licensed Open-beta testing
AtcheAge (上古世纪) 2Q16 3D fighting Massively Multiplayer Online Role Play Game (MMORPG) Licensed Open-beta testing
Lost Saga (王牌对决) 2Q16 Arcade game style action MMOG Licensed Closed-beta testing
Maplestory 2 (冒险岛 2) 2Q16 3D cartoon style MMORPG Licensed Closed-beta testing
Path of Exile (流放之路) 2Q16E 3D Real time MMORPG Licensed
Yu Long Zai Tian (御龙在天) 2Q16E 3D Real time MMORPG Licensed
Kritika (疾风之刃) TBC 3D cartoon style fighting action Licensed
Sura (天刹) TBC 3D next-generation high-end fighting MMOG Licensed
MX (勇者大冒险) TBC ATM (Action, TPS, MMORPG) Licensed
Iron Knight (刀锋铁骑) TBC FPS In-house
Lost Ark (失落的方舟) TBC 3D MMORPG Licensed
Rising Fire (火源计划) TBC Shooting RPG Licensed
Transformers (变形金刚) TBC FPS In-house
Source: Company, Daiwa
11China Internet Sector: 2 August 2016
NetEase: highlights from ChinaJoy
Focusing on “craftsmanship”
NetEase’s mobile pipeline in 2H16 looks robust to us
NetEase’s dominant position in the mobile RPG genre market is unlikely to see
any material challenges in 2H16
NetEase’s licensed PC game pipeline also looks solid, with a new version of
WoW and continuing healthy user momentum for Overwatch
Mobile games: role playing game king
Following the conference, we are now marginally more confident on the life cycles of FWJ
and WWJ, NetEase’s 2 major mobile titles. We are encouraged to see the company’s
experience in the RPG genre (including MMO, action, real-time and/or turn-based) pay off
amid the mobile age, and believe no other player in the market will be able to match
NetEase, in terms of both the quality and quantity of its mobile RPG genre games, in the
near term.
We have selected a few of NetEase’s mobile games in the pipeline/recently launched that
we believe are worth watching:
Tianxia (天下手游)
Outstanding visual Launch date: iOS version launched on 29 July
quality thanks to new Characteristics: MMORPG genre; developed in-house by NetEase; derived from the
in-house developed popular Tianxia PC version
game engine
Our take: Tianxia (iOS platform only) was launched on 29 July. The game ranked No.4 on
17173.com’s most anticipated game list, and now ranks No.3 on the free game chart at the
China iOS store. We have seen initial positive gamer feedback on the responsiveness of
game action partly due to the adoption of NetEase’s new game engine. We are optimistic
on the monetisation potential of this game, and believe the performance of Tianxia could
be a near-term share-price catalyst for NetEase.
NetEase: screenshot of Tianxia NetEase: screenshot of Tianxia
Source: Company, Daiwa compiled Source: Company, Daiwa compiled
Audition (劲舞团)
Highly anticipated title Launch date: finished multiple testing on Android; currently undergoing iOS closed-
adapted from popular PC beta testing; expected to launch in 3Q16
title Characteristics: Dance genre; licensed from T3; derived from the popular Audition PC
version (operated by Jiuyou in China)
Our take: Audition is one of the most popular dance-genre PC game in China over the
past decade. We see great potential for this game as: 1) the dance genre in general has a
large user base, as evidenced by the success of the PC version of Audition and Tencent’s
casual dance game DA (节奏大师), 2) there is currently no direct competition for the mobile
12China Internet Sector: 2 August 2016
version of Audition, 3) and Audition has a good track record of monetisation and long-life
cycle (over CNY200m in annual revenue despite having been available in China for the
past 10 years).
NetEase: screenshot of an Audition test run NetEase: screenshot of an Audition test run
Source: Company, Daiwa compiled Source: Company, Daiwa compiled
Some of the other mobile games titles in the pipeline:
Datang (大唐无双手游)
MMORPG genre
Developed in-house by NetEase; based on NetEase’s popular PC title Datang
Expected to be launched in 4Q16
HIT: Heroes of Incredible Tales (我守护的一切)
ARPG genre
Licensed from Nexon; top mobile game title in Korea
Expected to be launched in 4Q16
XLFD (小李飞刀手游)
MMORPG genre
Developed in-house by NetEase; derived from popular Chinese martial art fiction written
by Gu Long; part of NetEase’s 5 Gu Long adaptation programme (NetEase will launch 5
mobile games based on Gu Long’s novels)
Expected to commence open testing in August 2016
NetEase: PC game pipeline (as of August 2016)
Name Chinese Name Genre Licensed/In-house Current testing stage
Heroses of Tang Dynasty 大唐无双 MMORPG In-house Closed-beta testing
HIT 我守护的一切 ARPG Licensed First test was on 28 June 2016
Demon Seals 镇魔曲 MMORPG In-house Closed-beta testing
Audition Dance Battle 劲舞团 Action Licensed First test was in late July 2016
Just Dance 舞力全开 Action Licensed
Onmyoji 阴阳师 Card RPG In-house
Da Tang You Xian Ji 大唐游仙记 MMORPG In-house
Wu Xian Huan Dou 无限幻斗 ARPG In-house
San Shao Ye De Jian 三少爷的剑 RPG In-house
Xiao Li Fei Dao 小李飞刀 RPG In-house
Jue Dai Shuang Jiao 绝代双骄 RPG In-house
Fu Mo Zhou 伏魔咒 MMORPG Licensed
Zhan Hun 斩魂 格斗 In-house
Girl Sword 妖刀少女异闻录 格斗 Licensed
Rich Man 大富翁 9 棋牌 Licensed
Mushroom Wars Online 蘑菇战争：太空战记 对战推塔手游 Licensed
Dai Hao Star 代号 star MMORPG
P1 P1 ARPG
Rong Yao Dui Jue 荣耀对决 MMORPG In-house
Wu Xian Zhan Zheng 无限战争 RPG In-house
S7 S7 FPS
Dai Hao Kuang Ye 代号狂野 - -
Source: Company, Daiwa
13China Internet Sector: 2 August 2016
PC Games: licensed titles are the bright spot
During our visit to the conference, we could certainly feel how popular Blizzard games are
in China, in particular WoW, Hearthestone, and most recently, Overwatch. The 3-hour
queues to get into the NetEase/Blizzard exhibition area suggests to us that the success of
the Blizzard franchise should continue, as well as the level of mindshare that both
companies have acquired among hard-core gamers.
We selected a handful of NetEase’s PC games in the pipeline/currently operating that we
believe are worth watching:
Overwatch (守望先锋)
Initial success; in-game Launch date: 26 May 2016
item sales, game play Characteristics: FPS shooting genre; licensed from Blizzard
innovation and user
retention are its next Our take: We believe the successful launch of Overwatch (over 1m copies sold in the first
focus areas 24 hours) will positively impact NetEase’s 2Q-4Q16 PC game revenue. Despite the initial
success, we would focus on Overwatch’s subsequent monetisation opportunity from in-
game item sales and the enhancement of game play (for example, the recent introduction
of a competitive mode), which we believe, if executed well ,will lead to a prolonged game
life cycle and further revenue upside for NetEase.
NetEase: audience watching screens in front of the NetEase/Blizzard exhibition area
Source: Company, Daiwa compiled
War of Worldcraft (WoW，魔兽世界)
New version should Launch date: Version 7.0 (WoW: Legion) to be launched on 1 September 2016
boost revenue in the Characteristics: RPG genre; licensed from Blizzard
next few quarters
Our take: During ChinaJoy, Blizzard and NetEast announced the new version of WoW,
which is scheduled to be launched on 1 September. We note there has been a recent pick-
up in users of WoW, given the public release of WoW: the movie in June 2016. We expect
the new version of WoW to further boost the revenue outlook of WoW in the coming
quarters. Separately, NetEase and WoW announced a change in the payment model for
WoW. Starting from 4 August 2016, the pay-per-minute option will be replaced by a
monthly/quarterly/annual subscription package. We consider this change in payment model
as an ASP increase and expect a minor drop in users as a result. Nevertheless, we believe
the new version should boost WoW’s revenue in the next few quarters.
14China Internet Sector: 2 August 2016
Hearthestone (炉石传说)
New expansion package Launch date: 1 September 1 2016
to support monetisation Characteristics: card genre; licensed from Blizzard
Our take: During ChinaJoy, Blizzard and NetEast announced their new expansion
package called Hearthestone: One night in Karazhan. The expansion will be officially
online on 11 August 2016. We noticed that the press conference for the global release of
this expansion package was held in China, suggesting Blizzard’s key focus on the China
market and a testimony for NetEase’s operation of Blizzard games in China.
NetEase: mobile game pipeline (as at 1 August 2016)
Name Chinese Name Genre Licensed/In-house Current testing stage
Wang Yi Quan Ming Xing 网易全明星 3D MOBA In-house First closed -beta test (activation code needed) on 12 Aug. 2016
Legend of Rhythms 战音 OL 2.5D RPG In-house Closed-beta test (activation code needed) finished on 13 Jan. 2015
Pirates: Treasure Hunters 夺宝联盟 3D MOBA Licensed First closed-beta test (activation code needed) finished on 12 May 2016
Wu Jin Zhan Qu 无尽战区 3D MOBA In-house Closed-beta test for Chihun (炽魂) finished on 15 Apr. 2016
Ni Shui Han 逆水寒 3D MMORPG In-house
War Rage 战意 3D Real-time MMORPG In-house
Hero Wars 最强军团 2.5D Real-time MMORPG Licensed
War Rage 战意 3D Real-time MMORPG In-house
Source: Company, Daiwa
15China Internet Sector: 2 August 2016
Industry themes: key highlights from ChinaJoy
When we talk about intellectual property, what are we talking about?
We consider IP a IP is marketing and it saves on user acquisition costs
marketing strategy IP has been a buzz word among online game industry participants since 2014. We
consider spending on popular IP and adapting games to them as a marketing strategy.
If potential players resonate with popular IP, which they tend to do, this reduces their
marketing expenses.
Online game companies are becoming entertainment companies
We have noticed a clear secular trend: the online game companies are investing in or
transforming into digital media companies, and digital media companies are investing
in online game companies. An example is Tencent, which has invested/participated in
the production of film/online games/TV series that have been adapted from existing
PC games or popular online literature. Many have tried to replicate Tencent’s
integrated approach – full control from idea generation to media distribution, but we
doubt that many will succeed.
Small developers facing tough times
IP price too high for many to bear
As we have already mentioned, many game developers, large and small, have rushed
to acquire popular IP over the past 2 years. This has driven up the IP price
significantly. Based on our discussions with a mid-size game developer, buying 1
popular IP-adapted mobile game requires an upfront payment of around CNY10m-
20m and subsequent 10% revenue sharing.
New regulations negative for the smaller CPs
SARFT recently announced tighter regulations on mobile game development. All
mobile game developers will be subject to regulatory scrutiny and obtaining a licence
number (版号) before their games are published. The Major app stores in China,
including the Apple iOS store, have announced that mobile games without a valid
licence number will be excluded from distribution, effective 1 October 2016.
We talked to some CPs during ChinaJoy, and they expressed concerns about the
uncertainty surrounding these regulatory changes, as it is not clear what the criteria for
the regulatory review will be. There is also no clear timeline for the review. Some said
the reviews could take up to 6 months. The higher compliance cost (both in terms of
monetary cost and time cost) will greatly disadvantage small CPs in competing with
the large players, including NetEase and Tencent. This could result in a greater
number of small developers working with the large operators vs. publishing games
themselves, as they did before.
Going overseas
Many of the smaller CPs said they are turning to the overseas market to avoid
domestic regulations. It is also easier for the CPs to publish games overseas given
they only have 2 channels for distribution: Google and Apple. On the flip side, their
major concerns in going overseas are related to possible IP infringement and having to
pay potential penalties as a result.
Virtual reality/augmented reality
Another buzz word we heard from industry players was “VR” (virtual reality) and “AR”
(augmented reality). The hardware players in particular are keen to launch their own
branded VR/AR hardware at ChinaJoy this year. For example, Sony launched official PS
VR gear, for a price tag of around CNY3,000 per item, much cheaper than many expected.
16China Internet Sector: 2 August 2016
In our opinion, commodity-like hardware, such as standalone VR gear lacks the necessary
differentiating features and therefore do not have much value. Content, on the other hand,
is the key arena for VR competition in the next few years, in our view. We believe we are
still at the accumulation stage for VR/AR content.
We note that Tencent has been relatively quiet on the VR front, although we suspect the
company is watching the industry dynamics carefully and waiting for an inflection point to
get in. NetEase announced that it has become a preferred partner of Google’s Daydream
VR initiatives. We are upbeat on VR becoming the next “running operating platform”, after
PCs and smartphones, but believe we are unlikely to see significant VR adoption in the
next 1-2 years.
17China Internet Sector: 2 August 2016
Recommendation and risks
Tencent
Tencent is our top pick We reaffirm our Buy (1) rating on Tencent. The key risk to our call on Tencent would be
in the China Internet higher-than-expected marketing and content expenses.
sector
NetEase
We also reiterate our Outperform (2) on NetEase. The key downside risks on our positive
call on the stock would be: 1) slower-than-expected mobile-game roll-outs, 2) faster-than-
expected declines in revenue from its legacy PC-game titles, and 3) regulatory uncertainty
over its Kaola platforms.
18China Internet Sector: 2 August 2016
Daiwa’s Asia Pacific Research Directory
HONG KONG SOUTH KOREA
Takashi FUJIKURA (852) 2848 4051 takashi.fujikura@hk.daiwacm.com Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com
Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles;
John HETHERINGTON (852) 2773 8787 john.hetherington@hk.daiwacm.com Shipbuilding; Steel
Regional Deputy Head of Asia Pacific Research Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com
Rohan DALZIELL (852) 2848 4938 rohan.dalziell@hk.daiwacm.com Banking; Capital Goods (Construction and Machinery)
Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 iris.park@kr.daiwacm.com
Kevin LAI (852) 2848 4926 kevin.lai@hk.daiwacm.com Consumer/Retail
Chief Economist for Asia ex-Japan; Macro Economics (Regional) SK KIM (82) 2 787 9173 sk.kim@kr.daiwacm.com
Jonas KAN (852) 2848 4439 jonas.kan@hk.daiwacm.com IT/Electronics – Semiconductor/Display and Tech Hardware
Head of Hong Kong and China Property Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com
Cynthia CHAN (852) 2773 8243 cynthia.chan@hk.daiwacm.com Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game
Property (China) Kevin JIN (82) 2 787 9168 kevin.jin@kr.daiwacm.com
Leon QI (852) 2532 4381 leon.qi@hk.daiwacm.com Small/Mid Cap
Banking (Hong Kong/China); Broker (China); Insurance (China)
Yan LI (852) 2773 8822 yan.li@hk.daiwacm.com TAIWAN
Banking (China) Rick HSU (886) 2 8758 6261 rick.hsu@daiwacm-cathay.com.tw
Anson CHAN (852) 2532 4350 anson.chan@hk.daiwacm.com Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design
Consumer (Hong Kong/China) (Regional)
Adrian CHAN (852) 2848 4427 adrian.chan@hk.daiwacm.com Christie CHIEN (886) 2 8758 6257 christie.chien@daiwacm-cathay.com.tw
Consumer (Hong Kong/China) Banking; Insurance (Taiwan); Macro Economics (Regional)
Jamie SOO (852) 2773 8529 jamie.soo@hk.daiwacm.com Steven TSENG (886) 2 8758 6252 steven.tseng@daiwacm-cathay.com.tw
Gaming and Leisure (Hong Kong/China) IT/Technology Hardware (PC Hardware)
Dennis IP (852) 2848 4068 dennis.ip@hk.daiwacm.com Christine WANG (886) 2 8758 6249 christine.wang@daiwacm-cathay.com.tw
Power; Utilities; Renewables and Environment (Hong Kong/China) IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer
John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com Kylie HUANG (886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw
Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap IT/Technology Hardware (Handsets and Components)
Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com Helen CHIEN (886) 2 8758 6254 helen.chien@daiwacm-cathay.com.tw
Head of Automobiles; Transportation and Industrial (Hong Kong/China) Small/Mid Cap
Brian LAM (852) 2532 4341 brian.lam@hk.daiwacm.com
Transportation – Railway; Construction and Engineering (China) INDIA
Thomas HO (852) 2773 8716 thomas.ho@hk.daiwacm.com Punit SRIVASTAVA (91) 22 6622 1013 punit.srivastava@in.daiwacm.com
Custom Products Group Head of India Research; Strategy; Banking/Finance
Saurabh MEHTA (91) 22 6622 1009 saurabh.mehta@in.daiwacm.com
PHILIPPINES Capital Goods; Utilities
Patricia Tamase (63) 2 797 3024 patricia.tamase@dbpdaiwacm.com.ph
Banking SINGAPORE
Ramakrishna MARUVADA (65) 6499 6543 ramakrishna.maruvada@sg.daiwacm.com
Head of Singapore Research; Telecommunications (China/ASEAN/India)
Royston TAN (65) 6321 3086 royston.tan@sg.daiwacm.com
Oil and Gas; Capital Goods
David LUM (65) 6329 2102 david.lum@sg.daiwacm.com
Banking; Property and REITs
Shane GOH (65) 64996546 shane.goh@sg.daiwacm.com
Property and REITs; Small/Mid Cap (Singapore)
Jame OSMAN (65) 6321 3092 jame.osman@sg.daiwacm.com
Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)
19China Internet Sector: 2 August 2016
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20China Internet Sector: 2 August 2016
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Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa
Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities
mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform
investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest
that may affect the objectivity of this research.
United Kingdom
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21China Internet Sector: 2 August 2016
the conduct of business in Germany.
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Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared
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past 12 months except as noted: no exceptions.
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of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual
analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months.
"2": the security is expected to outperform the local index by 5-15% over the next 12 months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months.
"4": the security is expected to underperform the local index by 5-15% over the next 12 months.
"5": the security could underperform the local index by more than 15% over the next 12 months.
Disclosure of investment ratings
Rating Percentage of total
Buy* 65.8%
Hold** 21.8%
Sell*** 12.4%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2016.
* comprised of Daiwa’s Buy and Outperform ratings.
** comprised of Daiwa’s Hold ratings.
*** comprised of Daiwa’s Underperform and Sell ratings.
Additional information may be available upon request.
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