The electronic sports (eSports) industry remains an undervalued sector that has significant room to grow. Companies that are likely to benefit from the growth of the industry range from video game developers, digital streaming platforms, game publishers, and many more.
Investors looking for exposure to this emerging sector can consider a number of small and medium sized companies that are building strong positions in the industry. These companies are not necessarily confined to tech firms, as there are many factors that go into computer games in terms of both software and hardware.
In the following, we will look at eSports stocks from Asian markets that are expected to reap the benefits of a flourishing Asian eSports sector and can offer strong returns in the future.
Investment potential in Asian Esports Industry
In Asian markets, eSports are taking off with venture capital pouring in; however, returns are slow to arrive. Popularity is growing particularly quickly in Korea and China. Japan has lagged behind, but initiatives to promote the spread of eSports have accelerated since 2016, including the establishment of the Japan eSports tournaments.
China’s eSports industry has been developing for more than 10 years now and has reported explosive growth in recent years. The booming eSports industry in China is mainly due to:
- Supportive government policies for the eSports industry
- Increasing demand for entertainment from the 90s and millennial generations
- The emergence of internet platforms, such as live-streaming platforms
- More involvement by internet giants
- The establishment of an industry alliance of games developers and platforms
- Development of VR/AR Technology will boost the growth of eSports because of the superior experience, especially with active VR
Revenue in the eSports industry in China comes primarily from advertising and sponsorships, with merchandising and tickets accounting for only a small portion of total revenue. Most industry players view their investment in tournaments and competitions as marketing expenses, as their target is to monetize the huge viewership numbers. Three of the largest game developer beneficiaries of eSports are Tencent (0700.HK), NetEase (NTES) and Perfect World (002624: CH). Tencent owns the majority of the mobile eSports titles in China. About 63% of eSports titles on the iOS plat-form are from Tencent. NetEase is also a strong player in mobile eSports titles on the iOS platform. Tencent has invested in two live-streaming plat-forms (Doubyu and Longzhu).
Japan’s e-sports market lags well behind globally due to the relatively low penetration of PC online games, the main battleground for e-sports. The industry is also somewhat stifled due to the presence of laws inhibiting market growth (e.g., Penal Code provisions against illegal gambling, Businesses Affecting Public Morals Regulation Act, Act Against Unjustifiable Premiums and Misleading Representations). However, promotion efforts have accelerated since last year, which is expected to result in rapid growth in market. Specific Initiatives include:
- Establishment of the Japan eSports Federation in March 2016
- Establishment of an executive committee in Japan for the Evolution Championship Series (EVO), the World’s largest fighting Game eSports Tournament
- Establishment of Japan’s eSports League in Nov’ 2016
- Issuance of Athlete visas for foreign eSports in 2016
Major Companies serve as sponsors with an aim of reaching younger consumers. In response to these trends, major companies are increasingly interested in the eSports market. Otsuka FoodsNetand Credit Saison have concluded sponsor agreements with professional eSports team Detonation gaming, and Nissin Foods sponsored the League of Legends tournament Logicool G CUP 2016. In Japan Niconico also has strong presence in eSports.
Asian eSports publicly listed stocks can deliver strong returns based upon the below points:
- Strong demographics for eSports
- Large companies and known investors are allocating capital to eSports
- Competition is still relatively low in Asian markets
Cyber Agent (4751: JP)
Profile: Japan based CyberAgent, Inc., is mainly engaged in the integrated net business. The Company operates in five business segments. The Integrated Net Business segment is engaged in the advertisement agency business, the smart phone media business, as well as the sale of advertisements for smart phone. The Media Related segment is engaged in the social game business, the operation of mobile media and personal computer business. The Ameba Related segment is engaged in the operation of Websites Ameba and Ameba Pigg. The FX segment is engaged in the foreign exchange margin trading business. The Investment Promotion segment is engaged in the discovery and promotion of investment corporations, as well as the establishment and operation of funds.
Key Investment Rationale:
- Specialty channel on Company’s online video service Abema TV service will not only provide stable advertising revenue, but could also yield synergetic benefits if used to promote the company’s new titles
- Strong internet advertising segment is gradually capturing major advertisers: In April 2016, Cyber Agent established a sales structure called the next-generation brand strategy office to attract major advertisers it had failed to reach until then, and results are starting to emerge (such advertisers were around 6% of Jan-Mar advertising transaction volume).
- Focus on new titles set for release this summer from Cygames in games segment: Subsidiary Cygames, which has generated a high rate of hit titles, plans to release two new titles this summer (Princess Connect! Re: Dive and PROJECT LOST ORDER).
- Mastering the art of creating hit Abema TV content: Thanks to hit programs during the Golden Week holiday, Abema TV was featured in the media, helping to boost recognition. As a result, weekly average users (WAUs) reached 5.5 million people, above the level over the New Year break, and download topped 17 million. Although it will still take time to fully monetize the channel, it seems CyberAgent is acquiring know-how in generating a constant stream of hit content and we think the market will continue to favorably view Abema TV’s potential given steady growth in user numbers and engagement.
- CyberAgent’s smartphone game title Shadowverse is used not only in the RAGE competition, but also in the Shadowverse Rise of Bahamut Famitsu CUP 2017 event sponsored by e-sports Promotion Agency in February 2017
NetEase, Inc. (NetEase) is a technology company. The Company operates an interactive online community in China and is a provider of Chinese language content and services through its online games, Internet media, e-mail, e-commerce and other businesses. The Company operates through three segments: Online Game Services; Advertising Services, and E-mail, E-commerce and others. Its online games business primarily focuses on offering personal computer (PC)-client massively multi-player online role-playing games (PC-client MMORPGs), as well as mobile games to the Chinese market.
Key Investment Rationale:
- NetEase continues to see benefit from its Blizzard portfolio. Overwatch, a team based first person shooter game (recognized as eSport as well), which launched in May last year, sold more than 5 million copies in the calendar year – a new record for “buy-to-play PC client games” in mainland China
- Company’s hit game Onmyoji has been widely embraced since its introduction in early September. It was named one of the top ten outstanding games of 2016 in China’s IOS app store and CEO expects to see exciting opportunities to extend its popularity worldwide.
- NetEase’s e-commerce business continues to thrive both Kaola.com and Yanxuan demonstrate a strong growth in the fourth quarter. This business is still in its development stage, and there is substantial opportunity here as this platforms mature
- Aside from its partnership with Blizzard, in a statement coinciding with the annual “Game Enthusiasts’ Day” on 20 May in 2016, NetEase announced its cooperation with Microsoft-backed game company Mojang. NetEase licensed Mojang’s smash hit Minecraft, both on PC and mobile, for operation in mainland China. Minecraft’s educational value, as a means to stimulate and develop creativity, has been recognized in a number of countries worldwide, and in China, the Ministry of Education also aims to promote the game to students. The ministry’s initial target for the game is to enlarge the young player user base and form a highly sticky player community rather than emphasize monetization; this may benefit the online gaming business in the long-term.
- NetEase has grown to become the No. 7 publicly traded game company in the world, according to estimates by market researcher Newzoo. Zynga is partnering with Netease to bring Dawn of Titans (free to play mobile game) to players in China. The game is expected to be released in China later this year. According to Michael Pachter of Wedbush Securities, Dawn of Titan s will contribute about $25 million of revenues in its first year.
- In 2015 NetEase brought to market mobile adaptions of two of in-house developed MMORPG PC games (Fantasy Westward Journey and New Westward Journey Online II). The company continued to make mobile adaptations of MMORPGs as well as developing and licensing new mobile titles within a range of genres. Mobile games contributed 8.0% of NetEase’s net online game revenue in 2014, a proportion that has since risen to 61.9% in 2016. According to NewZoo’s Feb 2016 release, Fantasy Westward Journey 2, which is published by Netease, owned the second position amongst mobile eSports title in China.
- On VR and AR front as well, NetEase is a serious contender and taking a leading role in terms of its developments and the potential game releases in the market. Earlier this year in 2017 they embedded some AR features within Onmyoji games, which also got a very good feedback from the market.
Company Profile: Headquartered in Kyoto, Nintendo is a top manufacturer of portable and home game consoles, as well as the developer of a number of popular titles, including Mario and Pokémon games. Founded in 1947, the company started out manufacturing playing cards for Western and traditional Japanese games.
- Focusing on potential for game titles to boost download sales: According to management, Mario Kart 8 Deluxe is off to a strong start from its April 28 launch (cumulative Japan sales: around 460,000) and the ratio of download sales has been much higher than expected. Nintendo platforms have tended to have relatively low ratios of download sales, but that could change substantially in the current cycle amid changes in users’ spending and playing habits and Nintendo’s stronger effort on network services, led by Nintendo Switch Online
- The lineup of Nintendo Switch software in 2017 includes a large number of titles that are well suited to e-sports, including Mario Kart 8 Deluxe, ARMS, and Splatoon 2. We focus on trends for these titles as drivers of Nintendo Switch penetration. We will also watch these titles as penetration drivers for Nintendo Switch Online, scheduled to launch service in 2018.
- Nintendo cooperated in holding the first Splatoon Koshien at Tokaigi 2016 in February 2016. Perhaps due to the large response to this event, Nintendo held a Splatoon online tournament in Europe in partnership with ESL in August 2016. It then held a second Splatoon Koshien at Tokaigi 2017 in February 2017, again attracting large interest even though this title was released nearly two years ago. These events provided significant promotional benefits, and Splatoon (released for Wii U in May 2015) has been an unusually large hit for completely new IP, with cumulative sales volume reaching around 5 million units. Additionally, Nintendo of America served an official partner for Genesis 4 (Super Smash Bros. tournament series held in the US) in January 2017.
- Nintendo is up 4.9% in U.S. trading after swinging to an operating profit in its Q1 thanks in large part to a successful launch of the Switch console. It had lost ¥5.13B last year; this quarter resulted in an operating profit of ¥16.21B, well above expectations