Investors seeking exposure to China’s growing mobile gaming industry should look at technology giants Tencent and NetEase , according to Goldman Sachs. The investment bank expects “China to see faster growth from mid 2024 supported by game launches and a loosening regulatory environment.” Goldman’s optimism on Tencent and NetEase despite expectations that both companies will have a slow first quarter “given [a] lack of new game contributions and a high base last year.” “However, 2Q24 is set to be an accelerating quarter with blockbuster title launches,” the Wall Street bank’s analysts, led by Lincoln Kong, wrote in an April 16 note. The launches include NetEase’s Naraka Bladepoint and Tencent’s DnF (Dungeon and Fighter) mobile, which is expected to hit the market in May. The analysts also foresee that the overseas market will be a “more important growth driver.” Tencent Tencent’s game sales were up 14% year on year domestically in March and 36% internationally. That was thanks in large part to growth in in its evergreen and legacy games such as Honor of Kings, Cross Fire and Golden Spatula, Goldman’s analysts wrote. The investment bank expects shares of Tencent to rise by around 20.5% to 408 Hong Kong dollars ($52.11) over the next 12 months. Key risks they foresee include more intense industry competition in performance-based advertising, unexpected delays in game launches, and slower-than-expected growth in its fintech and cloud businesses. The median price target of 58 analysts polled by FactSet points to a 21% upside for the stock. Among the analysts, 56 having a buy or overweight rating, one has a hold rating and one has a sell rating. NetEase NetEase posted a 16% year-on-year rise in domestic sales growth and 1% rise in international sales growth last month, Goldman’s analysts noted. They are now expecting shares in the tech giant to rise by around nearly 40% to $129 in the next 12 months. NetEase’s shares are traded on Nasdaq and the Hong Kong Stock Exchange. The median price target of 42 analysts polled by FactSet points to a 41.5% upside for its Hong Kong-listed shares. China versus Japan and South Korea The growth in sales for Tencent and NetEase is in line with an industry-wide expansion in China. Goldman’s analysts said Chinese publishers like Tencent and NetEase “stand out on a relative risk-reward basis” and are trading at a price-to-earnings discount of up to 40% against the counterparts in Japan and South Korea. Domestic mobile game sales fell by 12% year-on-year Japan in the first quarter of the year. Goldman’s analysts remain more bullish on its console game market than its mobile game market, saying there’s reason to be “upbeat on earnings owing to an upcycle for console hardware accompanying growth in the PS5 installed base.” As for South Korea, the analysts said “most players have seen an apparent downward trend in existing IPs, while market expectations focus around resuming new pipeline launches.” — CNBC’s Michael Bloom contributed to this report.
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