After the comprehensive entry of the game market into the stock era, the two giants of the industry are increasingly locking horns. There is no avoiding the all-round and fierce competition. Who will have the last laugh remains to be seen?$TENCENT (00700.HK)$ and $NTES-S (09999.HK)$Intense competition in all aspects is unavoidable between the two industry giants in the gaming market which has fully entered the stock era. Who will have the last laugh is yet to be determined?

Moreover, the overall environment of the game industry has changed dramatically, and many investment banking institutions have already placed bets on this trillion-dollar market. Morgan Stanley, in a research report released on June 18, bet more chips on Tencent.

Morgan Stanley analysts gave two reasons in the research report:

1. The structural change of the game industry itself (such as the transfer of regulatory priorities) is more beneficial to Tencent's low ARPU (average revenue per user) games such as small games.

2. Tencent's overseas investment has initially achieved results, and its international game business is showing strong momentum.

The changes in the game industry are good for Tencent, and the "largest small game platform in China" is ushering in its spring.

Morgan Stanley stated that under the premise of the transfer of regulatory focus in the industry, games with lower degree of monetization are expected to receive more policy benefits. Tencent's low ARPU games (such as those focusing on MOBA, FPS, party games, and small games) may attract more players. Tencent's online game revenue in the second half of the year is expected to increase by 10% year-on-year, while Netease's growth is 5%:

Since the regulatory rectification in 2021, the regulatory focus has shifted from protecting minors to countering excessive monetization.

Netease has taken active measures to limit the monetization of the "Dream of the Three Kingdoms" end-game, which may affect other games in its product portfolio.

We believe Tencent can benefit from its low ARPU game categories, as its main MOBA and FPS game content is lighter, and the degree of monetization through in-game purchases is lower.

In this context, the so-called "small games" are beginning to have their own spring:

Compared with 2021, the overall potential market size of small games in 2023 has increased sevenfold, exceeding RMB 20 billion.

We expect Tencent, which operates China's largest small game platform, to benefit from the prosperity of the industry, and small game revenue is expected to double in the next two years.

Morgan Stanley also believes that, in contrast, the once-leader in the Chinese gaming industry, MMORPG, seems to be difficult to regain its past glory, and Tencent has limited layout in this field:

MMORPG used to be the largest game category in China. Due to its pay-to-win mechanism, its ARPU is very high (ranging from RMB 500 to 1,000).

But we see that consumption is shifting towards games with value for money, and the revenue of MMORPG is shrinking (CAGR from 2019 to 2023 is -12%), and it is being eroded by new games.

Overseas investment has initially achieved results, and the international game business is showing strong momentum.

In addition to occupying an advantage in the domestic stock market, Tencent's favoritism by Morgan Stanley is also due to the initial results of its overseas investment. Morgan Stanley wrote in the report:

Tencent has been expanding its overseas game business by establishing its own game production studio and acquiring overseas studios, and these investments have initially seen results.

The CAGR of international games from 2020 to 2023 is 15%, and by 2023, international game revenue will account for 30% (14% in 2019).

We expect the CAGR of the international gaming market to be 11% from 2023 to 2025.

Edited by Jeffrey