"Tencent: Profitability to Improve as China's Cloud Gaming Era Opens"

Published 05 Jan.2020 09:09(KST)

[Asia Economy Reporter Eunmo Koo] As the era of cloud gaming opens in China, an analysis suggests that Tencent Holdings will be able to enjoy two positive effects in the mid to long term: acquiring a diverse user base and improving profitability.

According to Hana Financial Investment on the 5th, Tencent recently announced a partnership with NVIDIA in the cloud gaming sector. Tencent plans to use NVIDIA's GPU technology to offer PC games such as ‘Blade & Soul’ and ‘Fortnite’ through its cloud gaming service ‘START’, and will jointly conduct research and development in game engines, graphics, and artificial intelligence (AI).

Seunghye Baek, a researcher at Hana Financial Investment, stated in a report, “With China commercializing 5G last November, the biggest obstacles to cloud gaming services?internet speed and transmission delay?have been significantly improved,” and predicted, “With the launch of Tencent’s ‘START’, cloud gaming growth will accelerate in China.”

As the cloud gaming market in China enters a high-growth phase, Tencent is expected to benefit from two positive effects in the mid to long term: securing a diverse user base and improving profitability. Researcher Baek explained, “The characteristic of cloud gaming services is that users can enjoy various high-spec games without downloading, regardless of device type or hardware specifications,” adding, “This streaming method enhances convenience and accessibility, leading to the influx of diverse users, and eliminates the need to develop hard copies or platform-specific versions, enabling margin improvement.”

The Chinese cloud gaming market is expected to show strong growth over the next five years. According to market research firm iiMedia Research, the number of cloud gaming users in China is projected to increase sixfold from 63 million in 2018 to 370 million in 2023, and the market size is expected to expand from 630 million yuan in 2018 to over 100 billion yuan in 2023. Researcher Baek said, “Although Tencent’s performance this year will still be driven by mobile games, the cloud segment is expected to become a growth engine in the mid to long term.”

The stock price is expected to be revalued. Tencent’s stock price surged 15% over the past month due to the rebound in the Chinese stock market following the first phase of the US-China agreement and the unveiling of the cloud gaming service. Researcher Baek noted, “Currently trading at a 12-month forward price-to-earnings ratio (PER) of 29.1 times for 2020, considering that the PER was around 60 times at the 2018 peak, the valuation is attractive,” and forecasted, “This year, improvements in advertising and gaming segment performance will be effective.”