"Big Banks" JP Morgan: The game license system becomes a moat, Tencent and NetEase will become beneficiaries of AI

JP Morgan published a research report stating that the market is concerned that artificial intelligence (AI) will disrupt China's online gaming industry, but this view overlooks the unique supply-side constraints of the Chinese market. The bank believes that the application of AI will disproportionately benefit large existing operators such as Tencent (00700.HK) and Nio (09999.HK), and the current valuations present an investment opportunity.

The bank identifies four reinforcement mechanisms of AI in the Chinese gaming market: 1) AI enables operators to continuously update and expand their existing game portfolios that have already obtained licenses, with returns non-linearly increasing as the player base grows; 2) The AI advantage of large operators lies not in a single proprietary model, but in their ability to integrate AI into the orchestration of the entire production and operational processes; 3) The emerging UGC platform model has the potential to channel outputs from small creators into the ecosystems of large operators; 4) AI-driven anti-cheat measures, real-time voice translation, personalized monetization, and player retention models all yield better results as data scales increase.

The bank believes that the current market downgrades of Tencent and Nio reflect a market that indiscriminately applies global disruption theories to a structurally dynamic market that is precisely the opposite. As the market narrative shifts from "AI disrupting gaming operators" to "AI reinforcing operators in a supply-constrained market," the bank believes that the gaming businesses of both companies are likely to receive a re-rating. JP Morgan has given Tencent and Nio an "overweight" rating