Source: Barron's Weekly Author: Ed Lin The second largest public retirement fund in the United States recently made significant adjustments to its stock investment portfolio listed in the United States. The California Teachers' Retirement Fund increased its investment in Chinese e-commerce company, pdd holdings (PDD.US), and bought more shares of Discover Financial Services (DFS.US) and Williams-Sonoma (WSM.US) in the first quarter, while reducing its holdings of American Airlines (AAL.US) stocks. The California Teachers' Retirement Fund disclosed this stock trading information in a report submitted to the Securities and Exchange Commission. "Our public equity investment portfolio uses both passive and active strategies," the California Teachers' Retirement Fund said in a statement responding to a review request. "The portfolio's positions may change for various reasons, including fund managers' realignments of the active or index weights they require, or as a result of corporate mergers, stock splits, name changes or similar company actions." As of April 30, the fund managed assets of about $332.5 billion, making it the second largest public pension fund in the United States in terms of assets under management.
Author: Du Xinyi

A new global popular game has emerged: Supercell's latest work Squad Busters has taken the top spot on the iOS free overall chart in 119 markets within just one week of its launch, and is also in the top ten of the iOS games bestseller chart in 58 markets. As of the date of publication (June 7), the download volume of Squad Busters remains high, ranking in the forefront of the iOS US free overall chart.

Non-gamers may not be familiar with the name Supercell, but when it comes to the major shareholder behind it, it suddenly becomes clear: in June 2016, Tencent acquired 84.3% of its shares for a high stock price of $8.6 billion, making it one of the largest acquisitions in the history of internet companies. At present, Supercell has developed multiple popular games and has become an important support for the development of Tencent's gaming business, with no shortage of its presence in both financial reports and game release conferences last month. $TENCENT (00700.HK)$With the launch of Squad Busters, can Tencent's gaming business usher in new growth next quarter?

Domestic game market growth slows down.

Tencent's Q1 report showed that the company achieved a revenue of RMB 159.501 billion in the first quarter of 2024, a year-on-year increase of 6%; the adjusted net profit was RMB 50.265 billion, a year-on-year increase of 54%; and the gross profit was RMB 83.87 billion, a year-on-year increase of 23%. Among them, the revenue of value-added services (including gaming business) was RMB 78.6 billion, a year-on-year decrease of 0.9%.

On the domestic game market front, the company achieved a revenue of RMB 34.5 billion, a year-on-year decrease of 2%, and the total flow rate increased by 3% year-on-year. The decrease in revenue was mainly due to the impact of "revenue deferral."

Looking back to the previous quarter, Tencent's gaming business was not optimistic. The value-added service revenue in the fourth quarter was RMB 69.1 billion, a year-on-year decrease of 2%. Among them, the domestic gaming revenue was RMB 27 billion, a year-on-year decrease of 3%; the international gaming market revenue was RMB 13.9 billion, a year-on-year increase of 1%. The data in the 2023 China Game Industry Report also verifies this point. The actual sales of the Chinese game market last year were about RMB 303 billion, a year-on-year growth of 14%, but Tencent's gaming business revenue did not outperform the large cap.

Specifically, affected by the high base during the Spring Festival period last year, the sales of King of Glory decreased in the first quarter of 2024; and due to the weak commercial content in the second half of last year, the sales of Peace Elite also decreased.

In contrast, the revenue of Digging Gold Battle rose year-on-year, and the two terminal games, Faith Unleashed and Arknights, also contributed some income to the domestic game market. The financial report also stated that the decline in revenue from the domestic game market had been offset by the income "increment" of Faith Unleashed, Arknights and Digging Gold Battle.

It is also worth noting that as a game benchmarked against Egg Party, Dream Star, since its preheating to launch at the end of last year, has been performing extraordinarily. Seven Ma Data shows that the iOS downloads of Dream Star during the Spring Festival period reached 2.2244 million times; according to DataEye, the game has added 129 million new registered users across all channels in the first three months of this year alone, making it one of the fastest-growing games in recent years.

However, such a highly anticipated game was not seen in the Q1 report. In fact, the download volume of Dream Star experienced a cliff-like decline after the Spring Festival, with iOS downloads dropping from about 120,000 times a day to 17,000 times.

International market shows new growth momentum.

In the past two years, domestic game developers' expansion into overseas markets has not been smooth, with sales declining by 3.7% year-on-year in 2022, and the decline widening to 5.65% in 2023. In addition, in 2023, miHoYo achieved record-high revenue through fine-quality games such as Genshin Impact and Honkai: The Impact 3rd, surpassing Tencent and firmly holding the crown of the leading overseas mobile game distributor, followed by DotcGame with nearly three-fold growth in overseas revenue. The situation on the Chinese gaming industry's race to go global is not friendly to Tencent.

Under these circumstances, the performance of the overseas market in Q1 this year appeared to be even more impressive. Benefiting from the strong performance of Supercell's games (especially Brawl Stars) and the growth contribution of PUBG MOBILE, the company achieved a revenue of RMB 13.6 billion, a year-on-year increase of 3%, and the total flow rate increased by 34% year-on-year.

Among them, the daily active users of Brawl Stars in the international market exceeded that of the same period last year by two times, and the flow rate exceeded that of the same period last year by four times. The game was launched in 2018 and achieved a revenue of US$420 million in its first year, becoming the highest-revenue mobile game under Supercell in Asia. Although the data in 2023 was generally on a downward trend, it rebounded sharply this year. In March, the daily active users reached 68.96 million, and the monthly flow rate exceeded RMB 400 million.

PUBG MOBILE has continued its growth momentum in 2023. The financial report pointed out that the users and flow rate of the game both achieved growth in the first quarter. According to Sensor Tower, the game's sales in the first quarter increased by more than 30% year-on-year, ranking first in overseas mobile game downloads.

As another two focal products of Supercell, Clash Royale and Clash of Clans also showed a rebound trend in Q1, with the former achieving a year-on-year revenue increase of 104% and the latter of 20%.

UBS believes that Tencent's performance in the international gaming market will continue to be strong, and expects revenue to increase by 9% and 11% in 2024 and 2025 respectively. The company's total revenue is expected to break through RMB 60 billion in 2025.

Author: Du Xinyi.

Pay close attention to Longqing Games.

Longqing Games has always been an important area of investment for Tencent, and recent performance seems to indicate that in response to the problem of a sluggish domestic game market, the company is focusing its efforts on "Longqing Games" and proactively adjusting to adapt to the development and operation characteristics of Longqing Games.

In the 2023 annual report, Tencent set a clear criteria for persistently popular games: mobile games with an average of more than 5 million daily active accounts per quarter, or PC games with more than 2 million daily active accounts per quarter and annual revenue exceeding 4 billion yuan.

Currently, the game market has entered the stock phase, with severe monopolization by top enterprises and games, and increasingly strict requirements from users on game quality, leading to a gradual shortening of the life cycle of new games. Tencent also expressed during a phone conference that launching a new game has become increasingly challenging, not only competing with other newly released games, but also competing with existing and even continuously upgraded Longqing Games. Therefore, the development potential of Longqing Games is huge, their long-term operating characteristics make it a reliable performance support for the company and also provide sufficient time for the development of new products.

According to the "2024 Mobile Game Market Report" published by data.ai, only 13.3% of the new products released in the top 1000 downloaded games in the US in 2023. And most of the top-ranked games are long-lasting games that have been online for more than 2 years.

In addition, Tencent, which is proficient in transforming stock-end games into mobile games, is also expanding into new markets. On May 21, "Dungeon and Warrior: Origin" (referred to as "DNF Mobile Game") started its service and the pre-download volume reached the top of the iOS free list the day before, and it continued to climb to the top of the iOS free list and continued for more than a week. An industry research institution estimated that the game earned 63 million US dollars in revenue during the first week online in the Apple App Store in China alone, and player expenditure across all mobile platforms, including the Android store, exceeded $140 million, which is expected to bring in more than $1 billion in revenue for Tencent this year, and is also expected to become a new "Longqing Game".

Small games create new opportunities.

According to the "2024 Q1 China Game Industry Quarterly Report" published by Gamma data, both domestic and foreign game industries have shown a healthy growth trend in overall revenue for the first quarter of 2024. In addition, research data shows that investor confidence in the gaming industry is recovering, with investment amount increasing nearly three times compared to the previous year.

Although the domestic game market is recovering, its growth rate has been greatly reduced due to the market ceiling limit. Meanwhile, small games are gradually becoming a new opportunity. Tencent's financial report shows that the proportion of platform service fee revenue in the "Value-added Services" business increased gradually in the first quarter of 2024, and the total user usage time of small programs increased by more than 20%, while revenue increased by 30%.

Small games use small programs as carriers, need not be downloaded, and are easy to access and play. Currently, WeChat small games include both Tencent's self-developed products and third-party games. Internal company personnel stated that as the number of paying users and monthly active account users are significantly different, small games will not eat into the market for APP games, and will also make the WeChat platform beneficiaries in terms of sharing and advertising fees.

Data released at the end of April showed that the DAU (daily active user count) of WeChat small games in the first quarter of 2024 increased by 20% year-on-year, the IAA small game MAU (monthly active user count) reached 500 million, with the developer scale exceeding 400,000; in terms of commercialization, advertisers grew by 35% year-on-year, and it is estimated that the overall volume of commercialization of WeChat IAA small games will exceed 10 billion yuan this year.

In a research report by China Securities Co., Ltd., since 2022, Tencent's investment in WeChat small games has continued to increase, and the growth rate in 2023 has been particularly evident. In the future, small games are expected to bring about tens of billions of yuan in added value to the game market.

Looking back at the financial data for each quarter of 2023, Tencent's total revenue has shown a steady upward trend overall, but the revenue of its game business as a proportion of total revenue has been gradually declining, and this quarter only accounted for 30% of the total. Today's Tencent is no longer a pure game company, and the weight of game-related businesses is also significantly decreasing, but games are still Tencent's basic plate and "cash cow", and topping the overseas app charts also shows its strength and potential.

Editor / jayden