After seven years of development, the game "Black Myth: Wukong" has immediately caused a sensation. Since its launch, the game has sold millions of copies worldwide in just a few days, attracting attention and generating revenue with its hardcore gameplay. At the same time, it has also been mentioned several times by media outlets such as "Xinhua News Agency," "People's Daily," and "CCTV News" for its positive role in promoting traditional culture.

The outstanding performance of "Black Myth: Wukong" not only boosts the confidence of players in domestic games but also injects a shot in the arm for the game sector, which has long been in a weak operating state. It has been observed that, influenced by the popularity of "Black Myth: Wukong", the secondary market's attention to the gaming sector has significantly increased, especially certain flexible symbols that have shown unusual trends.

In early September, the interim reports of listed companies have been mostly disclosed. Taking advantage of this window, it may be an excellent opportunity for investors to re-evaluate the investment value of various game stocks. Looking at the Hong Kong stock market over a long period, the game sector has undergone several years of adjustment and currently exhibits characteristics of low valuation and a low base. From the interim reports, many stocks have delivered impressive results, such as IGG (00799) with a net income increase of over HKD 0.3 billion in the first half of the year. In addition, it announced an interim dividend of 8.5 HK cents per share, performing beyond market expectations. However, there are mixed results, as Chanyou Technology (02660) saw a decline in revenue and profit in the first half of the year, and Homeland Interactive (03798) experienced a net income decline of over 90% compared to the same period last year...

Against the backdrop of improving policy margins, the emergence of popular works can undoubtedly be seen as a "catalyst" for sector trends. However, based on the mid-term report, the fundamentals of the gaming industry are still highly differentiated, and investors may need to carefully select individual stocks in order to achieve excess returns.

Interim reports show divergent performance

For the game industry, which has been in a slump for a long time, the past year has not been easy. According to monthly data from the Games Working Committee, the domestic gaming market has shown a significant decline since September 2023, with the overall monthly scale dropping from 29.226 billion in August 2023 to a low point of 22.432 billion in April 2024.

During the overall downturn in the industry, the performance pressure of relevant companies should not be underestimated. However, a closer look at the financial reports of gaming stocks on the Hong Kong Stock Exchange reveals a wide disparity in performance among individual stocks.

Take XD Inc. as an example. Thanks to the positive market feedback on its self-developed new games, the average monthly active users of the company's online games reached 9.53 million people in the first half of the year, with a year-on-year increase in the paying rate by 1 percentage point to 11%. The average monthly game expenditure of paying users also increased by 68% to 218 yuan. Driven by the game business, XD Inc.'s overall revenue in the first half of the year increased by 26.7% to 2.221 billion yuan, and the net income attributable to the parent company increased by 127.4% to 0.205 billion yuan.

IGG also presented a remarkable interim report. Although the company's classic game 'Castle Clash' has experienced stagnating growth, the addition of new games such as 'Doomsday: Last Survivors' and 'Viking Rise' has brought in new revenue. At the same time, the company's app business recorded significant growth. The company's overall revenue increased by 9.4% to 2.735 billion Hong Kong dollars compared to the same period last year, and net income attributable to the parent company turned a loss into a profit, reaching 0.331 billion Hong Kong dollars.

While some companies have achieved steep financial growth, there are also some game companies whose performance is still bottoming out. Take Zengame Technology as an example. Due to the lack of strong new games to open up the market, Zengame Technology's revenue in the first half of the year declined by 8.2% to 0.934 billion yuan, and net income plummeted by 23.4% to 0.31 billion yuan. According to the interim report, the monthly paying users of Zengame Technology were 0.525 million, a decrease of approximately 8.7% compared to the same period last year.

Similarly, it is feared that the mid-term performance of Homeland ITL will fail to satisfy investors. The company's revenue and net income in the first half of the year were 0.836 billion yuan and 33.67 million yuan, respectively, with a year-on-year decline of 12.4% and 91.6%. The financial report shows that although the company adjusted its commercialization strategy during the period and saw a 70% increase in paying users, a lower recharge threshold lowered the ARPPU data, and the company's profitability also suffered a severe blow.

Will the strong product cycle drive the reevaluation of the sector's value?

Although the interim reports show mixed performance, it is undeniable that with the clock turning to the second half of this year, bullish factors in the gaming industry are gathering and fermenting once again.

In terms of new game performance, the summer of 2024 is expected to see a great variety of new works from major game companies. In addition to the previously mentioned "Black Myth: Wukong", companies such as Bilibili (B) and XD Inc. have also released popular games. According to DianDian Data, it is estimated that "Three Kingdoms: Moulding the World" will generate 1.4 billion in revenue in the first month and "Let's Go, Muffin" will generate 0.8 billion in revenue, both of which have performed relatively well.

Looking at the market's new product reserves, given that domestic game licenses have been regularly issued, the future distribution of products is expected to continue to improve. On August 30th, the National Press and Publication Administration released the approval information for domestic online games in August. A total of 117 games were approved, the highest number of licenses issued this year. Up to now, the overall number of game licenses issued in 2024 has remained high, with a total of 926 game licenses issued this year, including 76 licenses for imported games.

As for major game developers, Tencent has future reserves such as "Delta Force" and "Dawn of Stars", NetEase has reserved "Yanyun Sixteen Tones", and XD Inc. plans to release "Let's Go, Muffin" in multiple countries and regions overseas in the second half of the year.

In addition, thanks to the active progress of AI, more innovative gameplay elements are being applied to games. For example, some game companies have incorporated AI elements into new games, allowing AI characters to speak, vote, and participate in game activities alongside players.

Finally, looking back at the stock performance of key companies, since 2022, gaming stocks listed in Hong Kong have generally experienced a market downturn, leading to undervaluation. Currently, the overall valuation of the sector is approaching a reasonable or even underestimated level. In combination with the mid-year results, the performance of some companies has shown a significant improvement, and the current position has the potential for investment value. However, it is important to note that the quality of the gaming industry's recovery still needs to be observed due to the need for further improvement in consumer purchasing power. Against this backdrop, perhaps only strong performance can solidify the foundation for a rebound in stock prices, making it a more prudent choice for investors to focus on game developers with better-than-expected performance or rich reserves.