Zhongtai Securities: The application of AI in the gaming sector is expected to make significant breakthroughs, and the gaming sector has considerable repair potential

According to the Zhitong Finance APP, Zhongtai Securities released a research report stating that the gaming sector is currently at a neutral valuation, with no premium and significant potential for recovery. It is recommended to pay attention to the gaming sector, which ranks second to last in terms of growth since September, only slightly above publishing and lower than sectors such as film and television, marketing, and broadcasting. Considering the low institutional holding ratio, which was 0.5% as of Q3 2024, at a historically low level, there is strong potential for a rebound in gaming. Particularly between October and December, the gaming sector's growth has significantly lagged behind the more visibly implemented AI application marketing sector.

Zhongtai Securities expects that as the underlying AI technology continues to improve, gaming will be an essential scenario for the widespread adoption of any general user hardware, with significant room for valuation uplift. Recommended targets include KINGNET (002517.SZ), YAOJI TECHNOLOGY (002605.SZ), and also suggests paying attention to Perfect World (002624.SZ), ST Huatuo (002602.SZ), Giant Network (002558.SZ), and other targets at low valuation levels, as well as G-bits (603444.SH) and Shenzhou Taiyue (300002.SZ), which have stable performance and new products that will soon contribute incremental growth. For elasticity, it is recommended to focus on Shengtian Network (300494.SZ) and Tom Cat (300459.SZ), which have deep layouts in the AI field.

The main points from Zhongtai Securities are as follows:

The gaming industry is expected to present three major trends by 2025:

1. Expansion at both ends of mini-games and PC games, with APP games becoming lighter.

In 2024, the scale of PC games is expected to reach 67.981 billion yuan, and console games will reach 14.947 billion yuan, totaling 82.93 billion yuan, with a year-on-year growth rate at a nearly 10-year high. Cross-platform games, including "Endless Warmth" and "Delta Operation," as well as PC games represented by "Zhu Xian World" and "Black Myth: Wukong," are expected to perform well in 2024. Notably, "Black Myth: Wukong" has sold 22.7 million copies on Steam, generating $1.1 billion in revenue, according to VG Insights. The mini-program game sector will continue to thrive in 2024, with an overall scale reaching 39.836 billion yuan, a year-on-year growth of 99.2%. In addition to "Seeking the Dao of the Universe," which has consistently ranked high, new products such as "Endless Winter," "Fire at Zombies," and "Three Kingdoms: Ice Age" have also entered the top 5 of the WeChat mini-game bestseller list, with "Endless Winter" and "Three Kingdoms: Ice Age" being strategy-heavy products. Entering 2025, the trend of expansion at both ends is expected to continue, with the traditional mid-tier mobile game companies' advantages in MMO types gradually being squeezed under the trend of lightness, while shorter development cycles and higher frequency mini-games become a solution for many small and medium-sized companies. At the same time, the overall improvement in user taste and the upgrade of devices are driving the demand for higher quality and immersive console games.

2. Policies are expected to provide further support.

As of November 2024, there have been 1,184 domestic online game licenses and 97 imported online game licenses, totaling 1,281, which has already exceeded the total for the entire year of 2023. As of November 2024, there have been six rounds of imported licenses issued, significantly increasing from three times in 2023, reflecting a change in regulatory attitude. The average monthly issuance of domestic game licenses is 107.6 A significant increase compared to the 81.4 games throughout 2023. At the game industry conference in December 2024, Yang Fang, Deputy Director of the Publishing Bureau of the Publicity Department, stated that the Publishing Bureau is currently working with relevant ministries to jointly formulate a plan for leading technological innovation in online publishing, promoting a greater role for the gaming industry in serving technological innovation.

3. AI applications in gaming are expected to make significant breakthroughs.

With the continuous optimization and improvement of large models in 2024, as well as the decrease in the price per unit Token due to intense competition, a solid foundation has been laid for the widespread application of AI by 2025. As the final link in AI application breakthroughs, gaming, combined with various forms such as audio, visual, text, and interaction, is expected to accelerate the integration of gaming and AI, achieving breakthroughs in various sub-modalities.

Investment suggestion: The sector is at a neutral valuation, with no premium and significant potential for recovery. It is recommended to pay attention to gaming stocks with large marginal changes. Since September, the gaming sector's increase has ranked second to last among sectors, slightly above publishing and below film and television, marketing, and broadcasting sectors. Considering the low institutional holding ratio, as of Q3 2024, the institutional holding ratio was 0.5%, at a historically low level, indicating strong potential for a subsequent rebound in gaming. Particularly between October and December, the gaming sector's increase has significantly lagged behind the marketing sector, where AI application scenarios are more evident. It is expected that with the continuous improvement of underlying AI technologies, gaming will be an essential scenario for the popularization of any general user hardware, with substantial room for valuation uplift. Recommended stocks: KINGNET, YAOJI TECHNOLOGY. Additionally, it is suggested to pay attention to Perfect World, ST Huaton, Giant Network, and other stocks at low valuation levels, as well as Gigabit and Shenzhou Taiyue, which have stable performance and new products expected to contribute incremental growth. For elasticity, it is recommended to focus on ShengTian Network and Talking Tom, which have deep layouts in the AI field.

Risk warnings: 1. Risk of product launch timing not meeting expectations; 2. Risk of product launch effects not meeting expectations; 3. Uncertainty risk of game content regulation; 4. Risk of untimely updates on information usage; 5. Risk of third-party data distortion