Source: the finishing touch of Zhongjin
Authors: Zhang Xueqing, Yu Xianyao, etc.
Game plate recently increased attention, the performance is relatively active. We believe that, thanks to the normalization of the version number and the recovery of supply and demand, after the game sector has risen more than 40% from the 2H22 low, the valuation is still lower than the average of the past five years, and the market has not revised up the profit forecast as the external environment improves, and there may be a small double-click opportunity in the future. Specifically, the head manufacturer's product and version number reserve is fully filled, the performance is robust, the valuation is still at the bottom, and has a better investment performance-to-price ratio; small and medium-sized companies pay more attention to the trading opportunities of the product cycle.
The version number is normalized, affirming the multi-dimensional value of the game under the healthy development of the industry, 2023 or welcoming the year of supply and demand.
From the perspective of the external environment, we believe that there are obvious signs of marginal improvement in the game industry:
1) on the supply side, the normalization of the release rhythm of the version number boosts the confidence of manufacturers, which is expected to lay a foundation for the subsequent product release.
2) at the level of external evaluation, the people's Financial Review of Renmin net and Xinhua News Agency's Xinhua Daily Telegraph affirmed the positive value of the game, pointing out that while promoting the healthy development of the industry, we should "promote the release of new economic, cultural and scientific and technological values".
3) at the level of industry guidance, when the annual meeting of the game industry in 2022 was held in mid-February, the propaganda Department of the Communist Party of China Central Committee proposed to promote "positive energy" as the main tone of online game development and implement the "Network Publishing Technology Innovation and Development Plan". At the same time, guide the development of technological innovation at the bottom of the game.
We believe that, with the perfect implementation of juvenile adult protection, under the guidance of policies, the game industry tends to be healthy, standardized and fine on the supply side, and basically enters a stage of healthy and steady development. this year is expected to benefit from the normalization of the version number to welcome the new year; in terms of demand, there is a higher correlation between domestic game running water and head players' ability to pay, or benefit from economic recovery. Medium-and long-term dimensions are expected to achieve breakthroughs and applications in VR/AR, AI technology, game engines and other aspects to achieve high-quality development of the game industry.
Short-term plate valuation has been repaired, profit expectations have not been significantly revised, the head manufacturer has a significant advantage and the valuation is still at the bottom.
We believe that the game industry has experienced multi-stage valuation changes due to the impact of the macro environment and product cycle:
The rapid growth of the industry led to a rise in valuation (2019 ~ the first half of 2021): in 2019, the game industry achieved rapid growth driven by the restart of version numbers and the dividend of traffic operation; stimulated by the demand-end economy in 2020, the sector achieved profitability and valuation double-click, the key game manufacturers we selected in July 2020[6]The average forecast price-to-earnings ratio is as high as 22 times, the highest in nearly five years. Among them, the forward price-to-earnings ratio of Panax notoginseng / gigabit reached 34 times / 38 times in 2020, which is also a relatively high in history.
Different stocks were pushed up by the launch of a number of key products in the first half of 2021, among which Gibbit launched "Yimianyaoyao" and "Moore Manor" in early / mid-2021, pushing forward price-to-earnings ratio to about 26 times in June 2021. In the middle of the year, Sanqi Mutual Entertainment launched its own self-research "Douluo mainland: soul Master showdown", while Perfect World launched the online "Dream New Zhu Xian" and "Magic Tower" in the middle / end of the year, which, to a certain extent, pulled the performance of individual stocks.
Industry growth is under pressure and valuations are falling (from the second half of 2021 to 2022): according to the Game working Committee, real sales revenue in China's game market fell 10% in 2022 compared with the same period last year, the first negative growth in nearly 20 years. The total size of the industry grew at a compound rate of 5.5% from 2018 to 2022, of which 9.6% was for mobile games. Sector valuations as a whole are below the average of the past five years (16 times). In terms of individual stocks, the valuation multiple of the plate generally showed a downward trend in 2022.
Restorative growth will begin and valuation will be repaired (from the end of 2022 to the present): driven by the improved external environment and superimposed new product cycle, the valuation of the game sector has been repaired since the end of 2022, in which the average forecast price-to-earnings ratio of key manufacturers has rebounded to about 14 times. It is still lower than the average of the past five years (16 times).
Among them: the forward price-to-earnings ratio of NetEase Port / US stocks is about 40 to 15 times higher than that of the low valuation at the end of October 2022 (February 27,2023), which is still lower than NetEase, Inc's average forward price-earnings ratio of Non GAAP for the past five years (20 times). The forward price-to-earnings ratio of Panax Notoginseng is about 63% to 14 times higher than the low valuation at the end of October 2022 (February 27, 2023), slightly higher than the historical forward price-to-earnings ratio of 25 times (13 times) and still lower than the average of the past three years (18 times).
In addition, the release of the version number at the external environment level tends to be normal, while the market consensus is not significantly revised up. We believe that since the end of the year, benefiting from the normalization of the version number, the valuation of the game sector has been repaired, and now it has gradually shifted to the stage of focusing on operating conditions, products and profitability, but the profit expectations have not been significantly revised before and after the normalization of the version number; the current valuation level of related stocks is still at a low and medium level in history. Small and medium-sized manufacturers pay attention to the trading opportunities of the product cycle, and the leading manufacturers may double-click the repair opportunity with the launch of new products or performance and valuation.
Risks: lower-than-expected performance of new products, changes in industry regulatory policies, slow progress in profit repair, and increased competition.
Edit / Somer