According to IDC, China’s gaming market will reach $22.01 billion, with a compound annual growth rate of 15.57% through 2017. With the proliferation of smartphones in China, there is enormous opportunity to capitalize on the mobile platform, compelling companies to develop products tuned to it. Along with mobile games, companies are also developing web games that users play in a browser. The web games market is currently valued at $1 billion. Game developers are launching new games to expand their businesses and capitalize on the growing market.
Here I have chosen three game developers and analysed their future strategies to monetize on the growing opportunities in the Chinese gaming market.
The growth story
The company increases this revenue through expansion pack launches; it has already launched 25 expansion packs and plans to launch additional expansions every three months. These expansion packs attract loyal players who purchase items to enhance their game play. The company has a current user base of 2.04 million and an average revenue per user of $65.09 as of May 2013. An increase in average user revenue can boost the company’s revenue from $623 million in 2012 to $759 million in this year.
Changyou.Com Ltd (ADR) (NASDAQ:CYOU) also expects to launch the games DD Tank and Wartune on mobile platforms this year, games which already have successful web versions. According to Flurry, the number of active iOS and Android users in China is around 261.33 million. Last year, the mobile gaming market in China was worth $210 million registering a growth rate of 140% year-over-year.
Internet connectivity is poor in some parts of China, and this will increase the popularity of mobile games since users can download them and continue to play without connectivity interruptions. This has potential to boost the company’s earnings per share from $5.29 last year to $5.82 this year, and then to $6.68 in 2014.
The diversification story
In order to diversify its position in the MMO games market, Giant Interactive Group Inc (ADR) (NYSE:GA) launched the game World of Xianxia in May. The company’s MMO games portfolio mostly consists of the “ZT” series, and the new game launch will be a strong addition.
World of Xianxia’s plot mixes ancient mythology and swordsmen. The game will attract players because it gives the impression of mythical China mixed with a portrayal of natural beauty. Chinese gamers like games that have Chinese cultural touch and action. The game attracted 100,000 gamers on the first day of its commercial launch. At this momentum, the game is expected to generate $12.72 million this year and $74.86 million next year.
Giant Interactive Group Inc (ADR) (NYSE:GA) is increasingly focusing on its position in the fast-growing web games segment. As a result, the company launched the in-house web game called The Sky. In April, the company launched a pilot of this game on the Qihoo 360 web game platform. It also announced the launch of another web game, Genesis of the Empire, in the third quarter of 2013.
This expansion into web games is an effort to diversify the company’s online games portfolio. Giant Interactive Group Inc (ADR) (NYSE:GA) expects that the diversification will improve the revenue of its web game segment to $395 million by the end of the year, up from $342 million last year.
Mobile games and the repurchase story
Shanda Games Limited(ADR) (NASDAQ:GAME) is firmly established in the mobile gaming market thanks to is successful game Million Arthur, which contributed around $17.45 million (around 10%) to the company’s total revenue. It is an online mobile card game based on the story of King Arthur where gamers compete by recruiting knights and collecting resources.
After seeing the success of the game in the Korean market, the company launched the game in China. It should gain popularity since only one person can become the final winner. The game is free to play, earning revenue by selling digital items to enhance gameplay. Within eight hours of its launch, it became the top app in the Apple Store in China. The company expects mobile game revenue of $80.96 million this year and $88.71 the next year.
Shanda Games Limited(ADR) (NASDAQ:GAME) also announced a share repurchase plan of $100 million, which accounts for its 12% market value. This repurchase will continue until May 2014. The program utilizes the company’s excess cash effectively by strengthening its shareholders’ holdings. At the end of first quarter, the company had a net cash balance of $556 million; by May, it had already bought back 14.4 million shares. This is expected to increase the company’s earnings per share from $1.72 this year to $1.97 in 2014.
Conclusion
These three companies have definite plans to capture a larger share of the Chinese gaming market. Changyou.Com Ltd (ADR) (NASDAQ:CYOU) is planning to increase its revenue from its flagship game and plans to launch games on the mobile platform as well. Giant Interactive Group Inc (ADR) (NYSE:GA) is diversifying its revenue stream within the MMO segment and into the web games segment. Shanda Games Limited(ADR) (NASDAQ:GAME) is making big steps into the mobile games market and is enacting its repurchase program to use excess cash.
As a result, I recommend a buy for all three stocks.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Giant Interactive Group.
The article Play the Chinese Market with These Three Game Developers originally appeared on Fool.com and is written by Shweta Dubey.
Shweta is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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