Matters:
Note: On June 19, 2024, “Dungeons and Warriors: Origins” (later: DNF Mobile Games) officially announced that due to the expiration of the contract, DNF Mobile Games will no longer be available on some Android app stores, such as vivo and OPPO, starting June 20. Tencent encourages Android players to download from the game's official website.
Guoxin Internet views:
Removing some Android app stores is expected to increase the profit margin of games. Currently, some other game manufacturers have begun to choose optimization channels. Mainstream Android phone manufacturers such as Huawei, OPPO, and vivo jointly formed a “hardcore alliance” to uniformly set the game developer share ratio at 50%, which is higher than 30% of Apple and Google. However, since mobile game downloads still rely on traditional channels such as app stores, game makers have to accept this sharing ratio. DNF Mobile Games is no longer available on the Android channel, and the reduction in channel sharing fees is expected to increase Tencent Gaming's gross margin. In fact, in August 2023, NetEase's “All Star Street Ball Party” launched the slogan “No listing on the Android channel, all players split 1.5 billion”, making it the first NetEase game not to go online on the Android channel.
The first month of DNF mobile game sales is expected to reach 5 billion, and strong IP and high-quality content will continue to lead the growth of the game industry. According to the Qimai data best-selling list, as of June 21, the DNF mobile game has been at the top of the domestic iOS game best-selling list for 31 consecutive days. According to Sensor Tower's data, in the 11 days since it was released in May, the game's revenue in the domestic iOS market has surpassed the combined revenue of “Wang Zhe Rongyao” and “Peace Elite”, leading to a 12% increase in mobile revenue in May. We estimate that the first monthly turnover of DNF mobile games will reach 5 billion yuan.
Due to the excellent performance achieved by DNF since its launch, users' pursuit of high-quality content and love for IP has established the success of this game. It also indicates that the game industry has gradually completed the transition from “channel is king” to “content is king”, and the removal of some Android app stores is not expected to have a significant impact on the game's flow. In fact, in 2020, “Genshin”, a subsidiary of Miha Tour, refused to be listed on some Android channels, but in the month it went live for nearly 10 million, with a quarterly turnover of nearly 5 billion. After starting the hardcore league, “Genshin” still achieved unprecedented success in domestic and foreign markets, proving that good games do not rely on channel promotion and can continue to attract players with their quality and reputation. Judging from the current “Genshin” mobile game download channel ratio, Taptap accounts for 15%, Xiaomi accounts for 15%, Baidu accounts for 13%, and the AppStore accounts for 11%.
Investment advice: We believe that as the development of the game industry enters a stable period, the characteristics of the game industry will show that game shares are concentrated among leading manufacturers and tail manufacturers. The core reason is that if lower back manufacturers lack large DAU products with a long life cycle, it is difficult to withstand the cost of high-quality game development for a long time, or face a decline in competitiveness. Therefore, we continue to recommend Tencent. The company's future profit release is highly deterministic and sustainable, and changes in revenue mix and operating leverage are the driving forces for long-term profit release. Furthermore, the excellent performance of DNF Mobile Games once again proved Tencent Gaming's ability to operate in the long term. Considering the excellent performance of the new game and raising profit expectations, the company's adjusted net profit for 2024-2026 is expected to be 2024/2299/257.9 billion yuan (increase of 1%/2%/2%), respectively, and will continue to maintain the “better than the market” rating.
Commentary:
Removing some Android app stores is expected to increase the game's profit margin Android channel share cost is high, but most mobile games rely on such traditional channels. Game downloads can rely on channels including: 1) pre-installed by mobile phone merchants; 2) various app stores, such as Baidu Mobile Assistant, App Bao, etc.; 3) Traffic platforms such as Douyin and Kuaishou; 4) game companies' own platforms. At this stage, mobile game downloads still rely on traditional download channels such as mobile app stores. For example, in February 2024, the Android channel accounted for 72% of the “Wang Zhe Rongyao” TOP5 download channels.
Android channel In 2014, mainstream Android phone manufacturers at the time, such as Huawei, OPPO, Vivo, Lenovo, and Meizu, joined forces to form a “hardcore alliance” and jointly agreed on a 5:5 ratio between mobile phone manufacturers and game vendors (3:7 for Apple). Until now, if developers wanted to list games on affiliate channels, they had to abide by the 50% sharing rule. The 50% share of the Android channel also needs to be split after deducting the payment channel fee, which means that domestic Android channel game manufacturers can only get less than 50% of the share, and the profit margin is lower than that of the iOS platform.
Not being on the Android channel is expected to increase the profit margin of Tencent games. Currently, some other game manufacturers have begun to choose optimized channels. DNF mobile games are no longer available on the Android channel. Tencent encourages Android players to download on the game's official website. This will reduce channel sharing costs and have a positive effect on increasing the gross margin of Tencent games. In fact, in August 2023, “All Star Street Ball Party” launched the slogan “No listing on the Android channel, all players split 1.5 billion”, making it the first NetEase game not to launch on the Android channel.
Choosing to remove some Android app stores shows the excellent performance of DNF mobile games
DNF has performed well since its launch. When the pre-download was opened the day before launch, DNF had already reached the top of the iOS free list, and even led the associated app “DNF Assistant” to surpass Douyin and reach second place in the list. According to the Qimai Data Bestseller List, as of June 21, the game has been at the top of the domestic iOS game bestseller list for 31 consecutive days, and is the most popular mobile game in the past few years. According to Sensor Tower's data, in the 11 days since it was released in May, the game's revenue in the domestic iOS market has surpassed the combined revenue of “Wang Zhe Rongyao” and “Peace Elite”, leading to a 12% increase in mobile revenue in May. We estimate that the first monthly turnover of DNF mobile games will reach 5 billion yuan.
Taking the initiative to remove the Android App Store shows that DNF mobile games are strong enough, and “Genshin” has also chosen to cut off some Android channels. The current market environment pays more attention to content quality, and customer acquisition channels are also becoming more diverse with the popularity of short video platforms, challenging traditional channels to become an inevitable trend in the development of high-quality games. There is no shortage of top quality mobile games in history that have chosen to cut off the Android channel:
1) In 2020, “Genshin”, a subsidiary of Miha Tour, refused to be listed on some Android channels, but in the month it went live for nearly 10 million, and its quarterly turnover was close to 5 billion. After launching the Android League, “Genshin” still achieved unprecedented success in domestic and foreign markets, proving that good games do not rely on channel promotion and can continue to attract players with their quality and reputation. Judging from the current “Genshin” mobile game download channel ratio, Taptap accounts for 15%, Xiaomi accounts for 15%, Baidu accounts for 13%, and the AppStore accounts for 11%.
2) Additionally, Eagle Point Network's “Tomorrow's Ark”, Lilith's “The Awakening of Nations” and “Medal of War”, Celadon Network's “The Strongest Snail”, and Kuro Technology's “Lightning Tide” all declined to launch the Android channel after launch, but they all achieved excellent results.
Investment advice: maintain an “better than the market” rating
Tencent's future profit release is highly deterministic and sustainable. Changes in revenue mix and operating leverage are long-term profit drivers. Furthermore, the new game DNF mobile game performed well, which is expected to boost confidence in the Tencent game market. Considering the excellent performance of the game and raising profit expectations, the adjusted net profit for 2024-2026 is expected to be 2024/2299/257.9 billion yuan (increase of 1%/2%/2%), respectively, and will continue to maintain the “better than the market” rating.
Risk warning
Policy risks; risk of macroeconomic weakness due to repeated pandemics; risk of intense competition in the advertising industry; risk of new games not being launched as scheduled, etc.