Source: Broker China Author: Lin Qiao

At a time when artificial intelligence is rapidly developing, the investment logic in the gaming sector has changed dramatically. During the year, individual stocks in the gaming sector were clearly divided. Companies with an “AI+” concept led the sector, while many traditional game stocks were sluggish. Some organizations said that with the continuous iterative advancement of technology, AIGC technology is expected to help game development, which is reflected in shortening the game production and development cycle and reducing game development costs, thereby driving the entire game industry forward.

14 imported games approved

Among the recently approved games, games represented or developed by listed companies such as “Mega Man 11” by Tencent, “The Divergent Million King Arthur: Ring” by Perfect World, “Stray Traveler: Overlord of the Mainland” by NetEase, and games sold by listed companies such as Gigabit are listed.

Take “Mega Man 11” as an example. This game is a platformer action game developed and distributed on Switch, PS4, Xbox One, and PC by Capcom (a Japanese video game developer and publisher). It is the 11th game in the original Mega Man series, and is also a work commemorating the 30th anniversary of the Mega Man series. It was released in Japan on October 4, 2018.

“Divergent King Arthur: Ring” is a card game developed by Million Studios, a subsidiary of Perfect World. In addition, “King Capital Genesis Record” by Gibit, “Destiny Reboot” by Oriental Pearl, and “Sonic the Hedgehog Team Racing” by Migu Mutual Entertainment by China Mobile are listed.

Up to now, 46 imported game editions have been issued this year. Regarding the recent distribution pace and future market conditions in the game sector, Huatai Berry Foundation believes:

(1) At the level of supply and demand: The distribution cycle and quantity of editions are stabilizing. High-quality supply brings high growth in the industry, and the product cycle and industry sentiment are expected to continue to increase. With this, players' willingness to spend will be further released, and mini-games are expected to contribute significantly to market growth;

(2) Policy level: The domestic game market version policy is expected to be stable, the product update cycle is expected to continue, and the digital economy and cultural industries are expected to continue to receive policy support;

(3) Technical level: AI technology has now penetrated the entire life cycle of games. In the short term, it will help the industry reduce costs and speed up efficiency. In the long run, it may reshape production methods in the game industry, and restructure the value system through technological innovation, content innovation, and gameplay innovation, which is expected to open up room for growth in the game industry.

Judging from the data, there are clear signs that the business situation in the gaming sector is recovering.

According to the “Monthly Report on China's Game Industry for February 2024" released by Gamma Data, in February 2024, the size of the Chinese game market was 24.875 billion yuan, up 2.17% month-on-month and 15.12% year-on-year. At the same time, the overseas game business is steady and improving. According to Gamma statistics, the actual sales revenue for games developed independently by China in the overseas market was US$1,346 billion, an increase of 3.44% over the previous month. Simultaneous commencement of some product operation activities overseas led to an increase in turnover. In February 2024, a total of 37 Chinese manufacturers were included in the TOP100 global mobile game publisher revenue list, attracting a total of US$2.03 billion, accounting for 38.9% of the current global TOP100 mobile game publisher revenue.

Cathay Pacific Fund believes that from a fundamental point of view, the game industry is in an upward boom cycle. On the policy side, game version distribution is increasing in frequency; on the performance side, the performance of listed companies in the game industry is constantly improving.

Gaming stocks also need AI “support”

In terms of stock prices, take many game ETFs as an example. This type of fund tracks the China Securities Animation Game Index and made a big splash in the first half of last year, but then it clearly retracted. The decline within 2024 was about 5.79%, and individual stocks within the index were also clearly differentiated.

For example, the most important stock, Kunlun World Wide, which also has the concept of artificial intelligence, achieved an 11.5% increase during the year, and Optical Media, which has both a film and television business and “AI+ video,” rose by about 24%; while traditional game stocks such as Gbit, E-Soul Network, and Xunyou Technology all faced a decline of more than 20%.

Why is there such a huge difference?

Cathay Pacific Foundation said that on the one hand, AI Wensheng video applications are expected to change the way creators work in games and other fields, reduce creation costs, and improve production efficiency; on the other hand, MR represented by VisionPro will open a new era of spatial computing, and the playability and immersion of games may improve rapidly in the future.

At a time when artificial intelligence is rapidly developing, the investment logic in the gaming sector has changed dramatically. Regarding the selection of individual stocks, the GF Securities Research Report suggests grasping two main lines: the first is to select sectors with good performance and high-quality companies. As the visibility of first-quarter results gradually becomes clear, it is expected that valuations will rise steadily with the support of performance expectations. Second, continue to track marginal changes in AI applications within the sector. Both overseas and domestic AI are expected to make continuous progress. In particular, after large-scale domestic models gradually show usability, it is expected to raise the market's expectations for the implementation of AI applications.

“It is recommended to focus on companies that have AI products or technology layouts and are continuing to advance implementation. Also, you can pay attention to some companies that have sufficient cash on their accounts, have attractive dividend ratios, and are actively expanding new businesses or anticipating new business layouts.” The research report argues.

Galaxy Securities also has a similar view: AIGC technology continues to advance, and the game industry is expected to benefit: with the recent release of Wensheng's video model Sora, the basic world model Genie, and the 3D modeling tool Dust3r. “We believe that at present, AIGC already has some productivity value: with the continuous iterative advancement of technology, AIGC technologies such as Wensheng Video and AI 3D modeling are expected to help game development, which is reflected in shortening the game production and development cycle and reducing game development costs, thereby driving the entire game industry forward.”

Huajin Securities, on the other hand, believes that “the krypton model is no longer the only way out.” In the current market environment where user acquisition costs are increasing, the mobile game industry is shifting to cater to casual players, and the trend of “casual” mobile games is becoming more and more obvious. Combined with the low price effect of recent popular new games, the price of a single krypton has been lowered or in line with the “casual direction” of the game, significantly improving customer acquisition efficiency. Furthermore, the game industry has entered an era of competitive inventory. The krypton model is no longer the only way out; the “gameplay” of selling values, items, and skins is being replaced by widespread user penetration. Players are becoming more rational or willing to pay for their preferences. AIGC technology helps superposition content devices that empower DAU users and become an important support for new games.

edit/lambor