As per IDC research, the gaming market in China is expecting to grow at a CAGR of 15.7% and will finally notch a figure of $22.01billion in 2017. The smartphone deployment will be increasing from 100 million in 2012 to 500 million by the end of this year. As a result, the mobile gaming market is going to witness a growth at a CAGR of 46% from 2012-2017. Currently, the mobile gaming market is worth around $1billion.
China Mobile (NYSE:CHL) is the largest telecom operator on the planet. The company is increasing its capital expenditure to $30 billion. Approximately half of this is going to be spent on the carrier's TD-LTE development. The growth of the mobile gaming market will be in line with the estimates once faster networks are available. The company has already doled out contracts worth $3 billion and is planning to build more than 200,000 base stations across 30 provinces in China.
Expansion pack & diversification growth story
Changyou (NASDAQ:CYOU) is the developer of the famous game "Tian Long Ba Bu," or TLBB. The game is on Chinese martial arts. This game belongs to the massively-multiplayer online role-playing game (MMORG) category. The company is focusing on increasing the revenue per user of the game through sales of the expansion packs.
The company has launched 25 expansion packs so far, and it has plans to launch more every quarter. These expansion packs enable the users to buy items and enhance their game play experience. The company currently has an user base of 2.04 million. As of May 2013, the average revenue per user stands at $65.09. Through additional revenue from these expansion packs, the company expects that the revenue will increase from $623 million in 2012, to $759 million in the current year.
Changyou is also planning to replicate the success of its web-version games, "DD Tank" and "Wartune," on the mobile platform in the current year. If we take a look at the App stats, one striking feature that stands out is that the apps developed by the domestic companies have more traction in China as compared to the apps developed by non domestic companies. Being a Chinese game developer company, this bodes well for Changyou.
Last year, the mobile gaming market in China was worth $210 million, registering a growth rate of 140% year-over-year. Changyou expects that these initiatives will increase its EPS from $5.29 last year to $5.82 this year, and then to $6.68 in 2014.
Diversification to propel growth
Giant Interactive Group (NYSE:GA) is yet another Chinese game developer company. The company's MMO games portfolio mostly consists of the "ZT" series. In an attempt to diversify its portfolio, it launched World of Xianxia in May this year. On the very first day of its launch, it attracted 100,000 gamers. At this momentum, the game will generate about $12.72 million this year and $74.86 million next year. The company feels that this is a sound addition to its portfolio of games.
Giant Interactive is also focusing on the rapidly expanding web gaming market. As Internet penetration across China increases, the web gaming segment will also be a good source of revenue.
This year in April, Giant launched a game called "The Sky" on a pilot scale on the Qihoo 360 web game platform. It also announced the launch of another web game, "Genesis of the Empire," in the third quarter of 2013.
This move into web games is an effort to diversify the company's online games portfolio. Giant Interactive expects that these initiatives will improve the revenue of its web game segment to $395 million by the end of the year, signifying a year-over-year growth of 15.5%. This is going to be accretive going forward.
Mobile games and share repurchase for growth
As a gamer, if one has played "Million Arthur," then I am sure one would have heard of the developer of this very popular game. Shanda Games (NASDAQ:GAME) has developed this game. Miller Arthur contributed around $17.45 million to the company's revenue.
On the back of the success of this game in the Korean market, the company launched it in China too. This is a freemium category game (free to download with in-app purchases for enhancing the game-play experience). Within eight hours of its launch, it became the top app in the Apple Store, in China. In the current year, the company expects to generate revenue of $80.96 million from the mobile gaming business.
In order to strengthen its shareholders' holdings, Shanda announced a share repurchase plan of $100 million. This repurchase will continue until May 2014. At the end of the first quarter, the company had a net cash balance of $556 million; by May, it had already bought back 14.4 million shares. This will be increasing the company's earnings per share from $1.72 this year to $1.97 in 2014.
As per the survey data from Flurry as shown in the graphic, the Apps developed by the Chinese companies have a far greater user engagement in China. The three stocks are of the domestic game developer companies, and these will have a far better user engagement as compared to the games developed by the non-domestic companies. With the proliferation of smartphones, and Internet expansion in China, these stocks can perform well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.