UBS: Expects total revenue of China's mobile games to decline by 4% year-on-year in the third quarter, with Tencent and NetEase outperforming the market most favorably

UBS published a research report indicating that, according to UBS Evidence Lab data, it is expected that in 2024, under a high base, the total revenue of China's mobile games in the third quarter will decline by 4% year-on-year and grow by 2% quarter-on-quarter, which is relatively weak compared to the past third quarter's quarter-on-quarter performance, possibly due to fewer new game launches in the summer compared to the same periods in 2023 and 2024.

Although industry growth is slowing, UBS noted that two major companies maintained their outperformance, with Tencent (00700.HK) achieving a 9% quarter-on-quarter revenue growth, benefiting from the strong contribution of "Delta Action," and it is expected that the newly launched mobile game "Special Forces Heroes" will generate total revenue of RMB 400 million to 500 million in September. UBS believes this game has robust potential for stable long-term operations.

In addition, NetEase (09999.HK)(NTES.US) also outperformed, with mobile revenue growing quarter-on-quarter, in line with UBS's forecast of a 5% quarter-on-quarter growth, as the quarter-on-quarter growth from "Egg Party" and "Yanyun Sixteen Sounds" was offset by the quarter-on-quarter decline of "Nishuihan" and "Identity V." It is worth noting that UBS's tracking of NetEase only accounts for about 40% of its reported mobile game revenue, which means a significant portion of NetEase's mobile game revenue may have shifted to non-app store channels.

According to UBS Evidence Lab data, Douyin, Xiaohongshu, and Tomato Novel are the applications that performed prominently in terms of major usage time share in September. Kuaishou (01024.HK) launched Kling 2.5 Turbo on September 23, currently ranking first in both text-to-video and image-to-video generation. iQIYI (IQ.US) saw its monthly active users (MAU) decrease by 10% month-on-month/year-on-year in September. Nevertheless, UBS expects iQIYI's third-quarter membership revenue to achieve low single-digit quarter-on-quarter growth as planned.

UBS holds an optimistic view on online entertainment, with the most favored sub-industries being selected gaming stocks with profit upside potential/new product launch catalysts, including Tencent (key buy target), NetEase, and AI leader Kuaishou