According to the Zhitong Finance and Economics APP, Guosen Securities released a research report stating that it is expected that Tencent Holdings (00700) will adjust its net income to 219.8/248.2/272.9 billion yuan in 2024-2026, corresponding to 24E/25E/26E PE ratios of 16/14/13x, and continues to maintain an "outperform the market" rating. With the domestic game industry entering a mature stage, focus on trends such as the platformization of large DAU games and the subsequent performance of new products. The deferred revenue and base effect will drive Tencent's game into a strong growth period in the second half of 2024 and the first half of 2025. It is recommended to pay close attention to the launches and performance of "Delta Operation", "Locke Kingdom Mobile Game", "King of Glory World", "Fearless Covenant Mobile Game", etc.

Guosen Securities' main points are as follows:

Current situation of Tencent's overseas games:

Relying on acquiring subsidiaries and collaborating to develop games. The overseas game market has strong localization characteristics and mature overseas markets (Europe, America, Japan, and South Korea account for about 60%) have been developing for a long time, with a preference for console games and a focus on game quality, making innovation in gameplay the main battleground. However, while focusing on the fun of games, mature overseas markets still need to explore game commercialization. Chinese companies represented by Tencent excel in GaaS (game as a service), providing insights into how in-app purchases can monetize overseas games.

What have Tencent's overseas game subsidiaries like Supercell done?

Change in Supercell's management strategy, by increasing operations to promote commercialization. 1) Supercell started expanding its operational staff in 2022, recruiting monetization design managers in 2023; 2) The revenue recovery of "Brawl Stars" in 2023 was due to simplifying high-frequency daily activities and introducing a new season card system. However, there is uncertainty in adjusting the commercial operations of game monetization, requiring courage to bear the short-term risk of declining game revenue. For example, after the commercial operations adjustment of "Brawl Stars" in 2022, the revenue dropped to historic lows.

Implications for Tencent's games?

Seeking change through operations, Tencent Games actively adjusts. Tencent's 24Q1 earnings conference stated: If a game that should be an evergreen tree stagnates, the problem is usually not with the game itself, but with the team operating the game. Since the second half of 2023, the industry has seen Tencent Games: 1. Internally restructuring domestic studios, downsizing overseas Riot; 2. Operationally, changing the commercialization team for games like 'King of Glory'; 3. Innovatively launching the 'Spring Shoots' plan, increasing research and development investment in new opportunities, and accepting medium-sized products.

How to view Tencent Games' development?

As the marginal effect of innovation in the gaming industry decreases, Tencent overall becomes more robust. Tencent Games has a strong project management team. Around 2019, as gameplay gradually saturated and innovation benefits decreased, Tencent's investment, operation/commercialization experience became crucial, making the overall structure more robust. Currently, the combination of 'gameplay + IP' is no longer easily viable, only high quality can stand out in the gaming market. Teams with higher quality often need significant industry accumulation, and the overall investment return cycle also becomes longer. Since Tencent began investing and cooperating overseas in 2008, with investments in over a hundred companies and now rich IP reserves, the company has abundant production experience.

How to evaluate the valuation of games?

The development of new games itself entails a high level of uncertainty, but looking at leading overseas companies, it is found that large game factories with diversified categories and evergreen IPs, even after revenue growth slows to single digits, the overall valuation remains relatively stable, with EA and Activision Blizzard PE valuations trading in the 20-30x range in 2021. The company believes that pricing for such manufacturers mainly reflects the overseas market's view that the gaming scene has high stickiness, top manufacturers with leading R&D capabilities, operational capabilities, and evergreen game IPs, having a relatively stable long-term market share and generating high-quality cash flow.