Tencent game threat seen overdone in NetEase’s US$8 billion sell-off
THE US$8 billion wipeout in NetEase’s market value over the past three weeks on concerns of competition from a new Tencent Holdings game ignores the company’s strong market position in China.
Bulls believe that NetEase will rebound, thanks to the massive popularity of its Eggy Party, as well as a promising pipeline of new titles. They also note that the company is a “pure play” in games, which are more recession-proof than other consumer segments where Tencent is exposed.
Hong Kong-listed shares of NetEase are down 10 per cent from a November high on the perceived threat from Tencent’s Dream Star, which is due to be released in Friday (Dec 15). NetEase is still up 43 per cent this year, far outpacing Tencent as well as Chinese technology and global game peers.
“We believe NetEase is macro-defensive with its solid longevity legacy games and track record of new games,” Julia Pan, an analyst at UOB Kay Hian Hong Kong, wrote in a note. Moreover, party games are the fastest-growing genre, and Eggy Party has “dominated” the segment, Pan said.
Analysts have unanimous buy ratings on NetEase’s Hong Kong-listed shares, with an average price target implying a gain of 30 per cent over the next year, according to data compiled by Bloomberg. The stock’s put-to-call ratio based on total open interest has been falling this month, suggesting that options traders are also becoming more bullish on the stock.
‘Party royale’
Released in May 2022, Eggy Party remains among the top app downloads in China. Its so-called “party royale” format is popular with more casual users, especially young women. Players of the game control egg-like characters that compete in a variety of minigames and obstacle courses.
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Tencent’s heavy investment in Dream Star spawned concern of a repeat of its 2018 success with “battle royale” game Peacekeeper Elite, which quickly stole players away from NetEase’s Knives Out. Experts say the situation is different for Eggy Party, which has already achieved critical mass with more than 100 million monthly active users.
“Party games as a genre are gaining traction in China, and the arrival of Dream Star should help expand the total addressable market rather than simply eating into Eggy Party’s user base,” said Xiaofeng Zeng, vice-president at Niko Partners, a gaming consultancy company.
‘Macro-Defensive’
Economic conditions may also favour NetEase, which got 80 per cent of its revenue from games in the latest quarter versus 30 per cent at Tencent. With spending on games seen as resilient to downturns, NetEase may be less sensitive to China’s economic headwinds than large Internet peers that rely on e-commerce or advertising.
NetEase also has more games on the way to cushion any loss in popularity for Eggy Party, which is estimated to have contributed a mid-to-high single-digit percentage of the company’s third-quarter sales. Upcoming releases include Condor Heroes and Where Winds Meet.
“We see another buying opportunity emerging, mainly due to the overblown concerns about Eggy Party competition,” Morgan Stanley analysts including Alex Poon wrote in a note. “We expect its share price will regain momentum as NetEase announces the launch dates for multiple strong game titles.” BLOOMBERG
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