While China's mobile game industry has experienced robust growth, it is still in an early stage and has plenty of room for growth, because of the following reasons:
Increase in China's mobile internet users - According to iResearch, China's mobile internet users increased from 233 million in 2009 to 500 million in 2013 and are expected to reach 637 million by the end of 2015, representing a 3-year CAGR of 12.9%. In addition, China's mobile internet users as a percentage of total internet users have consistently increased over the past five years, from 60.7% in 2009 to 80.9% in 2013, and are expected to reach 87.1% by 2015.
Mobile game players accounted for half of mobile users - According to CNNIC, mobile game players reached 252 million in June 2014, accounting for 47.8% of all mobile users, up from 43.1% in 2013. Growth in the number of mobile users has become the main driver for China's game industry. While it took 12 years to develop over 300 million desktop game players in China, mobile game users reached the same scale within just three years.
Revenue growth from mobile games surpassed that of desktop games - Revenue of China's game industry was 49.6 billion yuan in the first half of 2014, up 46% from a year ago. Among those, 330 million of the total 400 million game players were mobile users, up 90% from a year ago. Revenue from mobile games reached 12.5 billion in the same period.
Mobile game revenue has plenty room for growth - According to JOGA, Japan's online game market was valued at 51.4 billion yuan in 2013. Of the entire market, 84%, or 43.3 billion were attributed to mobile and feature phone users. In China, mobile game revenue only accounted for 25.2% in the first six months of 2014.
Increase in paying intention - Driven by convenience of mobile payment and an increase in the time spent on handsets, mobile game players are more willing to pay for games than desktop game players.
The value chain in mobile game industry can be divided into three parts: content providers, publisher/distributors and platform providers. Major players listed in the U.S. are as follows:
Content providers: Shanda Games (NASDAQ:GAME), Perfect World (NASDAQ:PWRD),Changyou (NASDAQ:CYOU), NetEase (NASDAQ:NTES). This place is highly fragmented. Tencent (OTCPK:TCEHY) has 16% market share, and is the number one player in this segment. Among the U.S-listed companies, GAME has the largest market share, while the rest are traditional online game developers looking to wedge into mobile games.
Publisher/Distributors: the largest publisher in China is China Mobile Games (NASDAQ:CMGE) with 18.1% market share, followed by iDreamSky (NASDAQ:DSKY) (16.2%), Chukong (12.4%) and FL mobile (10.3%), according to analysis. CMGE is the only publisher available to U.S investors.
CMGE - the least followed company with the highest potential
While there are many analysts reports about $QIHU, $BIDU, $GAME, etc, there are very few analysts covering $CMGE, which means a great opportunity for those who would learn its value the first:
- CMGE is the number one mobile game publisher in China -It has the highest ARPU and the largest number of game pipelines among its peers.
- Good track record in the publishing business- In 4Q 2013, it had 21 exclusively-licensed social games, and 30 exclusively-licensed console games. It plans to license another 64 social games in 2014, of which about 30 will be exclusively-licensed. CMGE attributes about 40% of its net revenue to licensed, third-party games in 2013.
- Wedging into self-development games - Early in 2013, CMGE launched its self-development games. Its most popular self-developed games include Joyful Da Ying Jia, Monster Island, Wu Xia Q Zhuan, a ninja-themed card game, San Guo Zhi Weili Jiaqiang Ban, and Nu Zhan Xuan Yuan - all of which have monthly billing of over 10 million yuan.
- Recent developments bold well for short-term growth - CMGE recently obtained world-top IPs and cooperated with world -class teams for game development: it worked with SNK Playmore and IGS Taiwan for new game development. These would enhance its market leader position in China and bold well for growth in the next two years. Details of recent developments are as follows:
- Rights to develop and publish mobile games in China on several world-top IPs, including One Piece, Naruto, Ikkyuu San
- Rights to publish classics in China such as Uncharted Water 5, The King of fighters '97, Samurai Spirits II, Metal Slug 2, Knights of Valour: Super Heroes and Oriental Legend
- Self-developing IP, Hero's Blade (mobile game), worldview and sound of which are produced by world-class team who produced LOL and Fates Forever
- Top sponsor for WECG from 2014-2016
- Crisis Action, the world's first FPS competitive mobile game, and Dance Everyday, a unique 3D dance theme game, are selected to be the official mobile game titles in WECG.
- On Aug 4, launched 51PK game battle platform, which supports multi-screen interactive and real-time battle
- Cooperated with SNK Playmore Corporation and IGS, the two arcade game giants and other domestic arcade game developers, as well as a number of mobile network operators, smart phones, PAD, smart TV and smart TV box companies to promote the 51PK game platform
- Rights to develop mobile games on Shaolin theme
Cheapest valuation and $26/share price potential - CMGE is a story about transformation: it started as a feature phone game developer and evolved into a smart phone game publisher. Financially, it has shown a sign of success. Starting from mid-2013, its revenue and EPS reported over 300% year-over-year growth in the last three quarters. Consensus expects 2014 EPS growth to be 361% year-over-year and 85% year-over-year in 2015. 2015 PE multiple of 6x is the cheapest among peers. Applying 11x 2014 PE multiple to 2015 EPS consensus of $2.36, we get the $26/share stock price.
Next time I will discuss what went wrong with CMGE recently. The incident tanked the stock price from $40 to $14 and I'll explain why.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in CMGE, TCEHY, QIHU over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
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