The Zhitong Finance App learned that Huachuang Securities released a research report saying that it is optimistic about the future development of the game industry. 1) Comparing domestic policies vertically, the industry has entered a new recovery cycle and the number of versions has continued to increase; 2) Comparing overseas policies horizontally, the industry has grown under regulatory regulations. Furthermore, the bank believes that the Chinese game industry has now become an advantageous industry and has a certain degree of global competitiveness. Looking ahead, the industry's development momentum is still sufficient, and short-term supply and demand are expected to maintain growth+long-term technology will continue to resonate. After early adjustments, the valuation of the game sector has returned to a low level. The mid-term proposal focuses on the upward direction of prosperity, long-term focus on technology implementation, and give the sector a “recommended” rating.

Incident: On December 22, the State Press and Publication Administration issued a notice to publicly solicit the “Measures for the Administration of Online Games (Draft Draft for Comments)”, making detailed statements on version numbers, content management, game consumption, etc. in online game publishing operations. We believe that the starting point of this new regulation is the need to make up for the “lack” of long-term supervision, and the second is to guide the long-term prosperity and healthy development of the industry. Currently, some game companies have issued repurchase announcements to express their active support and participation in feedback.

The views of Huacheng Securities are as follows:

Reviewing the 30-year development history of Chinese games, driven by R&D, leading the world.

Before 2008 was the PC game period, and page games, mobile games, and other forms (such as consoles) existed in the form of niche games; from 2008 to 2012, the PC Internet began to transition to the mobile Internet. Driven by Flash technology, a number of incremental users were absorbed through lower usage thresholds+ page games suitable for more fragmented usage scenarios; after 2013, the mobile game period mainly saw the rise of smartphone+4G networks. Mobile games opened the path of improved quality and expansion of gameplay, which in turn led to an increase in commercial carrying capacity. With technological development in the past 30 years, Chinese games have had relatively leading independent research and development capabilities in the mobile internet era, which has brought opportunities such as the emergence of innovative categories, the expansion of the scale of potential categories, and the expansion of quality content.

The Age of Discovery of Chinese Gaming:

1) Going overseas for games is an inevitable choice. We believe that the overseas mobile game market still has plenty of room to explore, and the game market structure in the European and American markets, led by the US, is dominated by consoles, and still has great potential for mobility, thus bringing opportunities to Chinese manufacturers with mobile games as the core. In addition, overseas games have also become an effective vehicle for spreading Chinese culture; 2) The overseas market is booming, and China's competitiveness continues to increase. The 10-year CAGR of overseas revenue was 20% (15% in the same period in China), and the market share also fluctuated upward (19% market share in '23 vs. 16% in '19). Currently, the number of leading overseas products is increasing in many regions, and they are optimistic about the expansion of regional advantages in the future; in addition, they are also optimistic about continuing to explore overseas markets with existing superior categories and breakthroughs in shortboard racing tracks.

After establishment, we look forward to the continuation: the industry is developing strongly, and short-term supply and demand are expected to maintain growth+long-term technology will continue to resonate.

In the short term, 1) supply side: the company's competitiveness continues to increase, the stable release of version numbers guarantees product supply, and looks forward to subsequent new product releases; 2) demand side: the stock of users is steady, and segmented circuit demand represented by young users, sinking scenarios, and overseas users continues to be tapped, and the industry's growth momentum is still sufficient. 3) In the long run, technology drives the development of the game industry, and games feed back technological innovation. The birth and iteration of AI and semiconductors is inseparable from the game industry. The current proposal focuses on AI. Gaming is an important implementation location for AI. It is not only an important tool for reducing costs, but also developing markets for gameplay. Chinese manufacturers are actively investing and looking forward to future progress.

Investment advice: Looking ahead, the industry's development momentum is still sufficient. Short-term supply and demand are expected to maintain growth+long-term technology will continue to resonate. After early adjustments, the valuation of the game sector has returned to a low level. The mid-term proposal focuses on the upward direction of prosperity, long-term focus on technology implementation, and give the game sector a “recommended” rating.

On the EPS side of the rebound, it is recommended to focus on three main lines:

1) Overseas business accounts for a relatively high proportion, and the representative direction of cultural overseas travel: Shenzhou Taiyue (300002.SZ) (old products continue to climb, two new products to be launched in 24 years);

2) Represents the leading qualitative direction and competes for youth growth: NetEase - S (09999), Tencent Holdings (00700) (Yuanmeng Star has high active performance);

3) Fundamentals seize segmentation opportunities+valuations have room for repair: Kaiying Network (002517.SZ) (rich product reserves), 37 Entertainment (002555.SZ) (leading the applet game circuit), Giant Network (002558.SZ), Perfect World (002624.SZ), Gbit (603444.SH), and Xinghui Entertainment (300043.SZ).

Risk warning: Turnover falls short of expectations, changes in user demand, progress in overseas trips falls short of expectations, risk of policy changes.