Tencent and NetEase are the two largest games companies in China and account for nearly 70% of total games revenue generated domestically. The two companies recently released earnings for the first half of 2018. In general, these big companies are just getting bigger. Some news this week that showed Tencent is at risk because of a temporary Chinese ban on new game licenses could be debated by the H1 results shown here.
H1 2018 Results:
- Net Revenue: RMB 147.2 billion ($22.2 billion), +39% YoY
- Operating Profit: RMB 52.5 billion ($7.9 billion), +25% YoY
- Total Games revenue: RMB 66.3 billion ($10.0 billion), +20% YoY
- Mobile games revenue: RMB 39.3 billion ($5.9 billion), +42% YoY
- PC games revenue: RMB 27 billion ($4.1 billion), -2.5% YoY
The highlight of Tencent’s earnings report was its continued strength in mobile games. Growth was primarily driven by the success of legacy titles such as Honor of Kings and the launch of new hit titles such as QQ Speed, PUBG Mobile, Saint Seiya and MT4. The number of daily active users, as well as time spent in game, continues to increase for Tencent as it drives engagement of legacy titles through initiatives such as esports and new game modes as well as continuing to introduce new titles based on popular IP to the mobile space.
Tencent is also starting to find success internationally. Honor of Kings is now available in more than 85 overseas markets under the name Arena of Valor. Whilst the game has struggled in the US, the title has seen adequate performance in Europe and strong engagement in Southeast Asia. Outside of China, the game now has 13 million daily active users and grossed $200 million in the first half of the year. Tencent has also launched and began monetising PUBG Mobile overseas with more than 14 million daily active users and over $50 million in revenue, according to research from Sensor Tower.
Revenue from PC games saw a slight decline in the first half of the year. A lack of new game launches is to blame, and there was reliance on legacy titles such as League of Legends and DnF to release content updates to retain users. Tencent is planning to introduce more foreign titles to the market this year including Fortnite, which has over 10 million pre-registrations in China, Rocket League, PUBG, Rainbow Six Siege and more.
In Q2 there was revenue decline that came from a lack of new game approvals from the government. We recently published a blog post that covers the government stoppage in new game approvals from March 2018, and continuing on now as of August, in detail here. As a result of this temporary ban, Tencent has been unable to monetise PUBG Mobile in China, which has over 50 million daily active users in the country. Tencent will need to wait for game approvals to restart before it can launch an official version of PUBG with monetisation in China. Despite this, Tencent did launch seven new mobile games in the second quarter, which were approved prior to the suspension, and also has a dozen games in its pipeline that already have licenses. Therefore, the company has a buffer of games it can release whilst the temporary ban is in place. As of August 17, the reorganized agency State Administration of Press and Publication (SAPP) (was SAPPRFT) has begun to issue 1-month testing licenses, but not full licenses.
Most gamers and consumers in the world outside of China have never heard of Tencent, yet it is the #1 force to be reckoned with. The company has employed a successful strategy that allows it to have a silent global presence and operate the most successful games in the world. The company is continuing to invest in fast growing areas such as esports, live streaming, Mini Games, and serious games in order to further expand, reach new markets and increase its domination of the games market.
H1 2018 Results
- Net Revenue: RMB 30.5 billion ($4.6 billion), +13% YoY
- Operating Profit: RMB 3.5 billion ($530 million), -56% YoY
- Total Games revenue: RMB 18.2 billion ($2.9 billion), -7% YoY
- Mobile games revenue: RMB 13.8 billion ($2.1 billion), -6% YoY
- PC games revenue: RMB 5.0 billion ($0.8 billion), -8% YoY
The slight decrease in mobile revenue was primarily due to decline in legacy self-developed titles such as Onmyoji and New Ghost, and partially offset by new games such as Knives Out, Chu Liu Xiang and Identity V. NetEase continues to find success with its legacy MMO titles such as Fantasy Westward Journey and its latest MMO game called Chu Liu Xiang, which is based on the popular novel of the same name, has been a hit in China and shows the strong popularity of high quality MMO games.
Whilst traditionally strong in the MMORPG category, the company has strived to launch games from other genres. Knives Out has been a success for NetEase as one of the first mobile battle royale games on the market. The game now has over 200 million players globally and monetisation of the game has been strong, especially in overseas markets such as Japan. Identity V, which is an asymmetrical battle arena game similar to Dead by Daylight, has amassed over 100 million users and has performed well. The company partnered with Behaviour Interactive, the developers of Dead by Daylight, to launch the game globally.
Revenue from PC games saw a slight decline during the first half of 2018. Legacy self-developed titles such as Fantasy Westward Journey, Westward Journey Online and New Ghost continued to perform well thanks to content updates and licensed titles, such as Overwatch and Minecraft, have also remained stable. However, a lack of new launches has hindered PC revenue growth for NetEase. A new PC MMO, Justice, launched on June 29th after 5 years in development. It has high-end graphics and in-depth gameplay to appeal to core PC gamers. So far, performance has been extremely strong.
Despite a slightly weaker first half, NetEase is positioned to rebound in the second half of the year through steady performance of legacy titles and strong performance of new titles. The company is focusing on a global strategy by bringing its self-developed games to overseas markets as well as continuing to explore potential investment targets such as Bungie, Mattel, Improbable and others to help supplement its existing pipeline or develop new products for the global games market.