Domestic game companies are at a faster stage of development, and the valuation has more room for repair.

The impact of the housing economy under the impact of the epidemic is prominent, and the interest in the game sector continues to rise. The current market discussion of game companies mainly lies in whether the valuation of the game sector still has room for further improvement.

At present, the domestic market mainly values ​​game companies with a price-earnings ratio. In terms of A shares, CICC released a research report saying that in terms of vertical comparison, as of June 24, the gaming sector’s price-earnings ratio (the latest twelve-month price-earnings ratio, arithmetic average) is lower than the historical average. But the overall sector has gradually recovered from the downturn before the second half of 2019.

Comparing horizontally, the current valuation of the game sector is at the upper middle level. On June 24, the valuation level of 32 A-share game companies ranked eighth, lower than the computer, electronics, medicine, communications and other sectors, which is comparable to the food and beverage sectors. Compared with overseas game companies, domestic game companies are at a faster development stage, the income stability has been significantly improved than before, the price-earnings ratio relative to the profit growth rate is at a low level, and the valuation has more room for repair.

However, the reason for the market’s concern about the increase in valuation lies in the concern about the instability of the game company’s future revenue growth.

Combine the income stability factors of three overseas head game companies Activision Blizzard, Electronic Arts and Take Two. CICC believes that overseas head game companies pass three Ways to improve the stability of its income growth rate: income diversification, including increased number, diversified categories, and development of overseas markets; IP serialization, on the one hand, continuously update the old IP data package to attract purchases, on the other hand, launch a variety of renewals A series of products are formed; star single-product long-term operation, star products bring continuous income every year, and the proportion of head product revenue is stable.

By comparison, A-share game companies have made progress in diversification, IP serialization, and long-term operation of star single products, and some companies have income stability Significantly improved. In addition, due to the higher proportion of mobile games in the domestic market, mobile games have higher frequency and more sustainable payment behavior than end games and console games, and are more biased towards consumer products.

Photo source: CICC
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So CICC believes that domestic game companies have stronger consumption attributes and will have better income stability. In the future, with the increasing stability of the revenue growth rate of game companies, A-share game companiesP/E ratio relative profit growth ratewill gradually improve, and the valuation hub is expected to move up.

From the perspective of longer-term industry development determinants, the improvement of the A-share gaming sector’s long-term valuation hub comes from more macro factors, such as technological breakthroughs (innovative Technologies such as cloud games), model innovation (monetization or marketing breakthroughs), and market space (user size and payment awareness increase) bring long-term development potential, optimistic about the game market’s long-term growth space.

In terms of Hong Kong stocks, China Merchants Securities found that after removing Teng.com, the market value dispersion of the Hong Kong stocks game sector is not much different from that of A shares; but from the perspective of valuation multiples, The overall valuation hub of Hong Kong stocks is lower than that of A-shares, and its price-earnings ratio is significantly lower than that of A-share listed companies.