Target price of HKD 445! TENCENT's gaming business welcomes new progress and will cooperate with NVIDIA.

Source: Gu Xinyu, Sun Mengqi, Zhao Li from CICC

Tencent held the SPARK 2023 game conference on the evening of May 15th, announcing more than 40 product and content plans, including 18 new games and content update plans for 8 flagship games.

Progress of new games

15 new games have obtained licenses (with agents as the main focus). Pay attention to the recent scheduled mobile games "White Night Aurora", "New Dragon Eight Parts" and the performance of the terminal game "Ark of Destiny", as well as the online time of "Fearless Covenant".

1. Mobile games: "White Night Aurora" is scheduled to be released on June 13th, and the current number of reservations has exceeded 4 million. "Battlefield No Borders" (Q3), "MapleStory: Legend of Maple" (Autumn) are scheduled to be released, and "New Dragon Eight Parts" and "Age of Sail: Lord of the Seas" announced that they will be tested online or without deleting files within the year.

2. Terminal games: "Ark of Destiny" and "Rebirth Edge" are scheduled to be released in the summer, and the domestic test of "Fearless Covenant" ended on May 15th and will start internal testing on June 8th. According to Gamersky, after the overseas launch of "Ark of Destiny", the cumulative number of users worldwide exceeded 20 million, and the highest number of simultaneous online users reached 1.32 million.

Flagship games continue to output new gameplay and expansion packs, continuously strengthening long-life cycle operations.

8 flagship games announced new versions/gameplay/crossovers. "King of Glory" continues to explore diversified crossovers, and cooperates with Dunhuang Research Institute and internationally renowned designer Ye Jintian to launch new skins respectively. In addition, it launched the "Ecological Protection" limited skin for its eighth anniversary.

"Peace Elite" will update the new version of gameplay "Sky Combat" in the summer. "League of Legends" continues to promote e-sports and plans to launch a new "Ink Shadow" series skin, and the mobile game will launch the "Frozen Thunder" game version. "CrossFire" will launch new versions for both terminals and mobile games.

TENCENT and NVIDIA cooperation

Game technology continues to be applied across borders and integrated into more ecological systems, becoming a universal technology.

Tencent announced the progress of five game technology cross-border application projects, including the full-motion flight simulator visual scene joint project, game-driven robot accelerated intelligent learning project, cloud game Great Wall time and space version, digital axis · small universe, digital scripture cave, based on game engine physics rendering technology, cloud games and other technologies, providing innovative solutions for multiple social scenarios such as "civil aviation", "digital cultural preservation", and "frontier exploration".

In addition, Tencent announced that it is working with global leading companies such as NVIDIA to try to build game engines and toolchains into the next-generation real-time collaboration technology solutions that cross teams and companies.

Investment advice

Tencent is still the main distribution channel in the game industry. Currently, the 18 new game plans plus the continuous update and operation of old games will continue to extend the game life cycle, and it can basically achieve the previously expected net increase of 10 billion yuan for mobile games/terminal games in 2023, with growth rates of 6%/5%, respectively.

Nexon (3659 JP) announced its first-quarter performance on May 11th, with game revenue in the Chinese market increasing by 39% year-on-year (mainly contributed by DnF), reflecting offline activities in 2023, including Internet cafes and other gradual recovery of the boost to terminal games. China International Capital Corporation expects Tencent's game revenue to increase by 3% year-on-year in the first quarter of 2023, with revenue from PC games and mobile games increasing by 9% and 2% year-on-year, respectively, recovering from the previous quarter (up 8% and down 2% year-on-year).

We are optimistic about Tencent's leading game development and long-term operational capabilities, and give the game business a 25 times price-earnings ratio based on industry average valuation, maintaining a target price of HKD 445 and a buy rating.