China has experienced, and is expected to continue to experience, solid growth in the mobile game market. According to research firm Analysys (http://english.analysys.com.cn/), the total market size of mobile games in China reached RMB12.1 billion in 2013, representing a CAGR of 54.3% from RMB3.3 billion in 2010, and is expected to grow at a CAGR of 52.3% from 2013 to 2016 to reach RMB42.7 billion in 2016. Key growth drivers for the mobile game industry in China include:
- Sustained economic growth and increasing disposable income. China has experienced significant economic growth over the last decade. As a result of large-scale urbanization, per capita disposable income of urban households has grown from RMB17,175 in 2009 to RMB26,955 in 2013, according to the National Bureau of Statistics of China.
- Increasing mobile internet, smartphone and tablet penetration. As it becomes more affordable and easier to access the internet via mobile devices, the universe of internet users is undergoing a migration from traditional desktop personal computers to mobile internet. Driven by increasing affordability and improved functionality of smartphones, according to Analysys, the number of smartphone users has reached approximately 480 million in 2013, and is expected to grow to approximately 800 million in 2016. In addition, as tablet devices continue to develop and offer more comprehensive functionalities similar to those of personal computers, an increasing population of internet users is expected to use tablets instead of personal computers at home for both entertainment and business purposes, leading to an increase in time spent on mobile devices. According to Analysys, the number of tablet users has reached approximately 57 million in 2013, and is expected to grow to approximately 203 million in 2016.
- Maturity of payment channels. Payment for mobile games and other value-added services in China have become more transparent, reliable and widely-accepted. Players have a variety of payment options for mobile value-added services, including through mobile network operation channels and payment channels such as Alipay, Unionpay, as well as bank cards and prepaid cards.
- Increased accessibility of data network connections. The continuous development of the data network infrastructure and reduced data streaming fees have enabled fast, easy and affordable mobile access to the internet through data network connections including 3G and Wifi networks. The emergence of 4G LTE networks is expected to further enhance connectivity for mobile devices in China. Moreover, as fast and easy access to mobile internet becomes available, the social network effect of mobile internet will continue to drive user engagement on mobile devices through social networks, social mobile games and other social functionalities on mobile devices.
One of the main players in the Chinese mobile gaming market is a company called China Mobile Games and Entertainment Group (CMGE), which is listed in the US on Nasdaq under the ticker CMGE. The company has integrated capabilities across the mobile game value chain. Based on grossing billings, CMGE has the largest market share of all mobile game publishers in China in 2013 according to a February 2014 report published by Analysys. CMGE’s market share reached 17.9% of gross billings generated by all mobile game publishers in China in 2013, according to Analysys. The integrated capabilities include the development, licensing, publishing, distribution and operation of mobile games, primarily in China. For the year ended December 31, 2013, CMGE had 27.5 million paying users (as measured by the total number of paying user accounts and total subscriptions for game bundles), including 7.7 million paying users of social games. As of December 31, 2013, CMGE had more than 500 research and game development employees and the company plans to continue to expand its team.
CMGE has a large portfolio of popular and high-grossing games, as measured by downloads and revenues. As of December 31, 2013, the game portfolio included 72 social games and 645 single-player games. In addition to existing games, the company has a strong pipeline of games with a variety of themes, cultural characteristics and features designed to appeal to a broad base of players. In 2014, CMGE plans to launch 50 social games and 32 single-player games.
What is special with CMGE, in our opinion, is that they have established a multifaceted publishing platform. They cooperate with numerous business partners, including chipset manufacturers, handset companies, app stores, web platforms, advertisers and mobile network operators. This multifaceted publishing platform makes them an attractive partner for game developers who seek to publish their games across multiple distribution channels and has allowed them to license a number of successful games from a broad base of mobile game developers. Notably, CMGE publihses Gameloft’s Minion Rush and Glu Mobile’s Eternity Warrior 3 in China. CMGE has been recognized as “The Most Powerful Publisher” by Shan g Fang Wang (sfw.cn), a leading industry website, and as a “Top 10 Publisher” by You Xi Duo (youxiduo.com).
A key differentiation factor, we believe, is CMGE’s own Game Center Application through which the company publishes its self-developed and licensed games. The Game Center application is its proprietary application for Android-based smartphones and pre-installed on millions of handsets throughout China. Through its Game Center, players can download over 1,000 games, both those that CMGE owns and licenses and those that are owned and licensed by third parties. CMGE developed the Game Center application internally and owns all of the intellectual property rights to the Game Center application.
Additionally, CMGE works with chipset manufacturers to pre-install the Game Center application and mobile games on handsets. For example, Mediatek, the largest integrated circuit design company in Asia and one of the ten largest integrated circuit design companies in the world, pre-installs CMGE’s Game Center application on its chipsets. CMGE also enters into agreements with handset companies to preserve its games on the handsets that have its pre-installed chips so that its games can remain available to end-users.
CMGE has entered into direct contractual relationships with many handset manufacturers and design houses. They generally pay handset companies with which they have direct contractual relationships a certain percentage of the proceeds received from mobile network operators or the service providers. The agreements with these handset companies generally have a term ranging from one to three years and may be renewed at the parties’ mutual agreement or automatically renew for one year absent any prior notice of termination.
Naturally, CMGE’s games are also distributed through a number of app stores, web platforms and social networks, including Apple’s App Store, 91.com, Baidu, HiMarket, Qihoo 360, Google Play, d.cn, China Mobile’s app store, Sina Weibo mobile portal and UCWEB.
Last but not least, CMGE has developed strong relationships with mobile network operators, including China Mobile and China Telecom. Pursuant to these relationships CMGE shares revenue generated by the games hosted on their network and platforms. CMGE has a channel cooperation agreement with China Mobile, the largest mobile network operator in China. Pursuant to the agreement, China Mobile promotes and distributes CMGE games to players on its mobile game platform, and CMGE receives technical support, customer support and user data from China Mobile.
As mentioned above, CMGE’s games include social games as well as single-player games which are available both individually and as part of game bundles. The following table shows CMGE’s game portfolio growth over recent years:
In addition to developing new games CMGE is also working on several new technological innovations. For example, the company is currently beta-testing a new website, 51PK.com, that will allow players of combat games to interact using different devices, such as smartphones, tablet computers and smart TVs. This website will create a virtual “hang-out” feature patterned after traditional game arcades where players can converse and compete. In connection with this website, CMGE is developing a solution to the traditional lag time for social games in China. Because of endemic network problems in China, there is typically a delay for social games. While this does not seriously impact card and certain other social games, it severely dampens player enjoyment of social combat games in China. CMGE is developing a proprietary technical solution to this problem that could potentially allow them to fulfill significant unmet market demand for these types of games that require real-time interaction among players and help them to attract new developers to our platform.
CMGE’s success is slowly but steadily also recognised by the bigger investment banks, only yesterday Barclays initiated coverage of CMGE with an Overweight rating and a 12-month price target of USD 32. This compares to yesterday’s closing price of around USD 22.
Barclays focuses in its initiation report on CMGE’s: 1) leading position in integrated mobile games publishing and development; 2) extensive and diversified games portfolio; and 3) multifaceted publishing channels/platforms. Barclays expects potential share price catalysts from: 1) overseas expansion initiatives; 2) the traction and revenue opportunity from 51PK.com; and 3) the rising penetration of its Game Center app via MediaTek’s handsets. Barclay’s USD 32 price target is based on 15x our 2015E non-GAAP EPADS of USD 2.13, implying a PEG ratio of 0.19x, which they believe is reasonable considering the hit-or-miss nature of new games’ success, the shorter life cycle of mobile games, and potential execution risks.
Elsewhere, we note that US investment bank Brean Capital currently has a target price USD 45.