The Chinese mobile game industry is a big business. It's 1.4 billion potential customers, hundreds in billions in revenue supported by a robust eletronics/phone payment infrastructure. I play my fair share of games so I will give some commentary on how game business works, especially with regards to market share.
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The game industry has similarities to the movie industry. It is composed broadly of 3 key parts - game development, game publishing and game distribution. All game companies are in one or more parts of this value chain. The game development is where the games are coded and built. They either fund this themselves or are paid by a publisher to do so. Once it is built, the publisher takes the game and handles marketing, legal and how games are monetised. Finally the distributor are platforms like Google Play and WeGame, where users search for and find games.
Like the movie industry games cost little to make relative to their potential revenue, so capex and COGS is low. It is also very fragmented, no single game owns a significant part of the entire revenue of gaming. Games have many categories which is really their own fiefdom - there's big business like PUBG which is an online real time multiplayer game to smaller Otome (female dating) games. What you are looking for in game companies in terms of moat is really a qualitative edge in maintaining those revenue from these games. A price advantage doesn't work so well.
Game users and hence revenues degrade quickly with few exceptions. If you'd remember Pokemon Go it was a huge hit but it lost something like 80% of its players in a year. Game stickiness, or some guarantee of future game revenues (through IP), is what you need. Games that don't degrade quickly tend to be highly repetitive and usually multiplayer instead of story driven. These are things like Team Fortress 2 or Bejeweled.
1) IGG Games
IGG games is a stalwart, maybe a fast grower. It is a game developer and self-publisher that derives 80% of its revenue from a very sticky game called Lords Mobile, a competitive multiplayer game. It was published in 2013 but revenues from Lords Mobile is still growing although slowly. It is unique in that many of its games are popular outside of China and its AR is written in USD. It has released a few new games in the same niche this year, which might turn it into a fast grower. I like this stock because
a) I have tremendous visibility on how its current and new games are doing through the app store reviews/downloads.
b) It has got a niche in a sticky area (multiplayer) and a fan base.
c) It is trading very cheaply at 5.5 P/E
The substantial risk is if Lords Mobile fails. Its revenue has been wobblingly recently. Games tend to fail hard and fast. If Lord Mobile fails, it has 300M USD to come up with the next thing to replace its revenue, but its a big risk. New games have done decently but haven't been the absolute hits that Lord Mobile has been. I think it is small in the medium term because of how old the game is and that I will have visibility when it happens, so it is still a good stock.
2) CMGE Technology
CMGE is a fast grower. CMGE is unique in that is a kind of publisher aggregator. It has the most IP of any mobile game company, even more than Tencent (99 IPs licensed/owned vs 21). The majority of its IP in numbers and revenue is however licensed. It publishes games like "One Piece Fighting Path" and "Dragon Ball Z Awakening". The great thing about IP is that is more sticky than average - although not as sticky as a great multiplayer game - and that in has a very high guarantee of future revenues, because you are basically transplanting that IP's fanbase onto your own game base.
CMGE's moat - and weakness - I think is its unusual positioning. Everyone is asking why can't One Piece's IP owners just go to Tencent or Bili Bili to develop and publish their games instead - or publish on their own? The latter answer is that China is a very different market, with its own self contained marketing and legal barriers which make it virtually impossible for foreign companies to publish there without a partner. The answer to the first is that all these companies like Tencent are trying to vertically integrate their game value chain by having in house developers publish by in house publishers on in house distribution channels.
It is very much like the war being fought between Netflix, Disney and HBO. They want to use exclusivity to build internal ecosystems of IP and distribution to create their own "blue oceans". CMGE is unique in that it publishes whatever IP it wants to on any channel it wants to. It largely outsources development to game developers, although it does have a small self development capacity it acquired.
CMGE grew revenue and profits by about 25% last year while trading at a 18x P/E now. If it maintains its current position as the real sole IP game entrant to the Chinese market its a huge win. And its position is really a winner-take-all like retail, its bigger size makes it more attractive and gives it more bargaining power. So the more it grows the stronger its position gets. And there's really a huge runway of IPs waiting to be released from the outside world into China, everything from anime to movies to books.
The big risk is that is moat is Tencent or Bili Bili could suddenly decide to abandon their blue ocean strategies and try to move into the area. CMGE has a huge present advantage which could be degraded quickly if there's enough profitability behind it. But the mitigation is that I think it is much more likely it is acquired, which would augment these tech giants' IP and strategies. Bili Bili has taken a very substantial investment in CMGE.
3) FriendTimes
Friend Times is a fast grower - or it might not be. FriendTimes operates in a very niche market of developing and self publishing female oriented Ancient Chinese games, a report from Poems I read says it is one of the biggest in terms of market share. Revenues and earnings went up by almost 30% last year while it trades at just 7x P/E and a 6% dividend.
But the real risk with FriendTimes is that is games degrade very fast and sharp, and its reliant on new and popular publishes of similarly themed games. So if it continues to do well in this niche its going to do really well, and if it doesn't it will tank. Unfortunately these games I have very little visibility on how well they're doing because their audience is almost exclusively in the Chinese Market. So its a high risk, high reward stock.
4) Tencent
Very richly priced at 25x P/E, it is a fast grower with a big moat. I've never even considered buying a stock with this high a P/E but Tencent is basically a game changer. It has a huge blue ocean for itself, in between WePay and WeChat and QQ and WeGames. It's proven itself incredibly able to execute in everything from games - it owns some of the highest grossing games in China - and even in movies, coming with animated hits like Grandmaster of Demonic Cultivation. Bili Bili, Sanda and all these other firms are much smaller and have more like blue ponds. It's got huge amounts of data, usage and everything a tech company could want. In many areas, it is actually far more dominant than even Google.
The risk is both its valuation and its strategy. It has to keep growing fast just to keep its price. And a blue ocean only works if you can execute brilliantly on it like Apple or Google did. If it doesn't you're left with a huge and very expensive vertically integrated mess. But I think Tencent has the majority chance of becoming the tech titan of China.
Attached are supplementary reading about these stocks.
Tencent's Many Moats
CMGE Analyst Report
FriendTimes Analyst Report
Homepage
PR Newswire
