How we differ: We are more confident than the street on the secular growth potential for ecommerce and online game players.
For Baidu, we expect a muted short-term performance given the low visibility on its business recovery and lack of share-price catalysts. Our long-term positive secular growth thesis on Alibaba still stands. Our top picks in the China Internet Sector are Tencent and Alibaba (BABA US, USD84.34, Buy ). What we recommend: Within the China online game sector, we believe NetEase and Tencent will continue to harvest the market and gain share at the cost of the smaller players. We see Tencent as the best positioned on this front. In our view, the few players that have control over upstream content production to downstream content distribution will grab the most value from the IP monetisation process. The leading online game companies are all talking about exploiting the value of popular intellectual property (IP) via movies/TV series/literature, etc. We expect the regulation to lead to an acceleration of mobile game industry consolidation in the next few quarters. The State Administration of Press, Publication, Radio, Film and Television’s (国家广电总局) (SARFT) recent requirement for mobile game developers to submit games for review before publishing will greatly increase compliance costs, lengthen the production development cycle and disadvantage small developers. Tightened regulation favours established players.
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Its PC licence game portfolio, including the recently launched Overwatch and the upcoming WoW 7.0, also look like they would offer good monetisation potential. Separately, we believe NetEase is in a league of its own in terms of the mobile role playing game (RPG) genre in China, and is ready to expand into new genres including Dance and Card & Action. Its leadership in the mobile multiplayer online battle arena (MOBA), casual, and first person shooter (FPS) genres is largely intact, in our view. Specifically, Tencent plans to launch fewer mobile game titles but with a higher quality to cover the majority of China’s mobile game population. We expect mobile game market consolidation to continue, ultimately benefiting the large players like Tencent and NetEase. What's the impact: Big players getting bigger. We expect both to meet, if not beat, our and the consensus mobile game revenue growth forecasts in their upcoming 2Q16 results. We are more optimistic on large online game players including Tencent (700 HK, HKD184.50, Buy ) and NetEase (NTES US, USD202.71, Outperform ) after the event. What's new: We attended ChinaJoy, Asia’s largest digital entertainment fair and World Mobile Game Conference (WMGC), in Shanghai on 29-31 July. China Internet Sector ChinaJoy wrap: online games, long may they reign Positive outlook on mobile game revenue growth unchanged expect recent regulation to accelerate mobile game industry consolidation Tencent and NetEase already dominate respective mobile hard-core genres in China both have strong mobile game pipelines in 2H16 Top picks in the China Internet sector: Alibaba and Tencent
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