Introduction: In recent quarters, the market has had some differences over the basic Tencent game market and subsequent growth momentum. In the report released earlier, we explained the view that the most difficult time for domestic games has passed, and that Supercell is driving the overseas game business to regain growth. In this report, we have further improved the granularity of Supercell research. We believe that the explosion behind it comes from Tencent's DAU operation experience empowering Supercell's premium R&D capabilities, and we are more optimistic about its sustainability. Furthermore, we think the summer season can focus on whether “Peace Elite” can revitalize the user market through operational adjustments and new “subway escape” (Tarkov-like) gameplay.
Supercell may enter the next expansion cycle, with DAU's operating endowment empowering global quality R&D capabilities; “Wild Brawl” is completed. As the world's leading mobile game company, Supercell contributes about a quarter of Tencent's overseas game revenue. In terms of operation, there are two notable characteristics: few officially launched products and a small number of team members. Since the launch of “Brawl in the Wild” at the end of 2018, the product has not been officially released for nearly 6 years, so revenue continues to fluctuate. At this point, we have observed two changes, and we believe that Supercell may be expected to move from a volatile state to the next expansion cycle:
We estimate that “Brawl in the Wild” is expected to drive Supercell turnover +105% and revenue +55% in revenue in '24, and the quarterly growth rate is expected to gradually increase. Since its launch at the end of 2018, “Wild Battle” has been in a state of decline with normal fluctuations in the life cycle. Since 2022, Supercell has begun to expand the size of the operation team to improve the weak operational capabilities of small teams, and superimpose Tencent's big DAU game operation capabilities. In 2023, “Brawl in the Wild” reworked the game's random mechanism, simplified and increased the frequency of daily activities, driving a month-on-month increase in turnover since the end of December, and reached a record high since launch. Based on a relatively conservative assumption, regardless of new products, Supercell's turnover is expected to increase YOY +105% to 26.3 billion yuan in 24 years, and revenue is expected to increase by 55% to 19.8 billion yuan; and due to the impact of the deferral cycle, the revenue growth rate is expected to continue to accelerate in the following quarters. We estimate that the revenue growth rate for the next four quarters will be 43%/74%/103%/94%. Furthermore, Supercell's incremental revenue contributed 4% to Tencent Gaming as a whole.
First new product after almost 6 years of launch. Supercell launched “Squad Busters (Burst Squad)” in overseas markets on May 29 — the first officially released product after a lapse of nearly 6 years.
Supercell pursues the product concept of “cutting out all non-outstanding products”. Although it has only launched 5 official products before, it cut out more than 30 products under development and testing in the pipeline during the same period. It was first launched on April 23 in 8 countries including Canada and Finland, and all topped the free list.
Optimistic about Takov-like gameplay, “Peace Elite” may iterate or inject new life through operational restructure+gameplay. We discovered that “Peace Elite” may be adjusted in the commercial version, and the “Metro Royale (Metro Royale)” gameplay will be updated during the summer. This model has contributed positively to the steady flow of overseas versions. Subway Escape is a “takov-like” gameplay. It places more emphasis on the fun of “collecting”, adapts to mobile devices, and is optimistic that it will revitalize the basic accounts of existing users and drive traffic growth.
The iteration of shooter games, from the mini-map competition representing hardcore shooting in the CS series, to the hero shooting represented by Overwatch, to the battle royale represented by PUBG, to the heroic battle royale represented by APEX/Eternity, to escaping from the battlefield+external numerical growth represented by Tarkov, each establishment of a new gameplay paradigm has opened up market space (for example, 17 years of chicken eating gameplay recreated a shooting market, and subsequent iterations have further expanded the market space), we think that Tarkov may be the new mobile solution and is expected to expand the DAU space .
Investment advice: Due to the higher-than-expected performance of “DNFM” and “Wild Brawl”, we raised the company's 24-26 revenue forecast to 6741/7377/796.2 billion yuan (the original forecast was 6740/7331/785.4 billion yuan), YOY +11%/9%/8%; the NON-IFRS net profit forecast to mother was 1993/2203/2393 billion yuan (the original forecast was 1992/2191/236.4 billion yuan), YOY +26%/11%/. The company was given the 2024 NON-IFRS net profit target PE 20x, corresponding to the target price of HK$464.88, maintaining the “recommended” rating for the company. (The exchange rate is 0.91 RMB/HKD)
Risk warning: Product launch progress or performance falls short of expectations; macroeconomic fluctuations; increased industry competition; delay period greater than 12 months.