Summary of Key Points from the Equity Research Report on the Gaming Sector Industry Overview - The gaming sector in China is expected to perform strongly in the second half of 2025, with the Wind Internet Games Index rising 17% since June 2025, compared to a 7% increase in the CSI 300 index [2][10] - The sector is currently trading at a 2026 estimated average price-to-earnings (PE) ratio of 16x, slightly below the historical average of 17x [2][28] Core Insights 1. **Gaming Consumption Growth**: Domestic mobile gaming revenue reached RMB125.3 billion in the first half of 2025, marking a year-on-year increase of 16.6% [2][10] 2. **Product Releases**: A-share gaming companies are planning to increase product releases in the second half of 2025, which is expected to drive sustained earnings growth [2][10] 3. **Profit Margin Optimization**: Game developers are optimizing channel costs, which may lead to wider profit margins [2][10] Company-Specific Highlights Perfect World (002624 CH) - Current Price: RMB15.91, Target Price: RMB20.90, Rating: Buy - The game 'NTE' is anticipated to be a major success in the ACG category, with expected gross billing of approximately RMB5 billion in the first year post-launch, contributing to 73% of the company's net profit in 2026 [4][10] - Projected net profit growth of 143% year-on-year in 2026 [4][10] Ultrapower (300002 CH) - Current Price: RMB13.49, Target Price: RMB15.60, Rating: Buy - Key products 'Staller Sanctuary' and 'Next Agers' are expected to see large-scale commercialization starting in Q3 2025, contributing to a projected CAGR of 17% in net profit from 2025 to 2027 [5][10] Kingnet Network (002517 CH) - Current Price: RMB19.76, Target Price: RMB25.20, Rating: Buy - Expected net profit CAGR of 18% from 2025 to 2027, with a target PE multiple of 21x [9][10] Sanqi Entertainment (002555 CH) - Current Price: RMB17.40, Target Price: RMB23.80, Rating: Buy - Projected net profit CAGR of 10% from 2025 to 2027 [9][10] Key Product Tracking 1. **Game Exports**: Overseas revenue of Chinese games grew 11% year-on-year to USD9.5 billion in 1H25 [3][10] - Diandian Interactive's 'Whiteout Survival' ranked No. 1 in overseas revenue for the first half of 2025 [3][10] 2. **Commercial Promotions**: Giant Network's 'Chao Zi Ran Xíng Dong Zu' launched in July, achieving a peak iOS ranking of No. 11 [3][10] 3. **Beta Tests**: Perfect World's 'NTE' completed its second beta test in June, showing significant performance improvements [3][10] Market Trends and Risks - The gaming sector is experiencing rapid growth, particularly in overseas markets, with leading games performing well [8][10] - Risks include delayed game launches, regulatory changes, and potential operational challenges in overseas markets [9][10] Conclusion - The gaming sector in China is poised for strong growth in the latter half of 2025, driven by robust consumption trends, new product launches, and improved profit margins. Key companies like Perfect World and Ultrapower are well-positioned to capitalize on these trends, with favorable ratings and target prices indicating potential upside for investors [2][10]

Core Insights - The 2026 Valorant Global Championship will be held in Shanghai, enhancing the city's status as a global esports hub and accelerating the growth of its esports industry ecosystem [1][4] - Factors contributing to Shanghai's appeal for international esports events include upgraded esports policies, a mature event hosting capability, and a concentrated industry presence [3][4] Industry Overview - In the first half of 2025, China's esports industry generated revenue of 12.761 billion yuan, marking a year-on-year growth of 6.10%, with a user base of nearly 493 million [4] - Shanghai remains the core city for esports events and clubs in China, hosting 22.9% of the country's esports events and having 34 clubs, the highest in the nation [4] Policy and Infrastructure - Shanghai's continuous upgrade of supportive policies for esports, such as the "Three-Year Action Plan for Healthy Development of the Esports Game Industry," provides a stable development outlook for the industry [4][5] - The city has established a mature event hosting capability, with specialized venues enhancing its capacity to host large-scale events [5] Market Dynamics - The substantial market size in Shanghai attracts global companies to establish their professional leagues there, creating a dual-driven model of "top IP + local events" [5] - The esports industry in China is projected to drive surrounding industries to exceed 1 trillion yuan by 2026, indicating its potential as a new economic growth point [7] Consumer Engagement - Events are creating new consumer experience models and expanding diverse consumption scenarios, as seen during the iQOO Cup National Finals, which attracted over 3,000 participants [8] - Recommendations for maximizing event-driven consumption include creating innovative cultural derivatives, implementing tiered consumption voucher strategies, and enhancing collaboration between tourism and esports [8]

Group 1 - The 22nd ChinaJoy was held from August 1 to 4 in Shanghai, where Perfect World held a signing ceremony for its 2025 esports strategic cooperation [1] - Perfect World established the Perfect Esports Partner Alliance with four major partners: NVIDIA, Intel, AGON, and Samsung to expand the esports industry ecosystem [1][3] - The esports industry in China is transitioning from "scale growth" to "high-quality development," with actual sales revenue reaching 12.761 billion yuan in the first half of 2025, a year-on-year increase of 6.10% [3] Group 2 - Perfect World aims to build a more complete esports ecosystem through collaboration with partners in hardware, software, and ecological support, promoting the globalization of Chinese esports [4] - The exclusive GPU collaboration with NVIDIA covers various esports scenarios, including events, internet cafes, and campuses, integrating AI with gaming [4] - Partnerships with Intel, AGON, and Samsung focus on supporting esports teams, customized products, and high-end hardware to strengthen the foundation of esports events [4]

Group 1 - Perfect World held a signing ceremony for its 2025 esports strategy on August 1, coinciding with the opening of ChinaJoy, establishing the Perfect Esports Partner Alliance with four major partners: NVIDIA, Intel, AGON, and Samsung [1][2] - The Chinese esports market is transitioning from "scale growth" to "high-quality development," with a projected actual sales revenue of 142.945 billion yuan in 2024, reflecting a year-on-year growth of 7.52% [2] - Perfect World aims to enhance the esports ecosystem by collaborating with partners across hardware, software, and ecological support, promoting the globalization of Chinese esports through major events [3][4] Group 2 - NVIDIA's GeForce RTX GPUs are recognized as the hardware standard for esports, providing superior performance and stability for major events [4] - Intel continues to lead in innovation, offering computational support for esports events, with many top-tier competitions utilizing Intel Core processors [4] - AGON has maintained its position as the top seller in the global professional esports monitor market, aiming to drive technological upgrades in the industry [4][5] Group 3 - Perfect World showcased seven premium games at ChinaJoy, including top esports titles like DOTA2 and CS, as well as popular IPs such as "Zhu Xian" and "Persona" [5] - The company emphasizes a player-centric approach, focusing on diversification, internationalization, and technological empowerment to enhance user experience [5]

Core Viewpoint - The sponsorship of Chinese DOTA teams by Lilith's game "Small Ice Ice Legend" signifies a deeper commitment to the esports ecosystem, transcending mere commercial interests [1][7]. Group 1: Sponsorship and Support - "Small Ice Ice Legend" has previously sponsored four Chinese DOTA2 clubs for the Riyadh Masters, demonstrating ongoing support for the Chinese DOTA2 training system [2][3]. - The game has announced sponsorship for the YB team, which is self-funded, as well as for the DOTA16 league finals, indicating a proactive approach to nurturing the esports community [1][12]. Group 2: Historical Context and Impact - "Small Ice Ice Legend," originally known as "Dota Legend," launched in July 2014 and achieved significant success, generating over 2.16 billion in revenue within six months [5]. - The game faced copyright disputes with Blizzard and Valve, leading to a name change and a substantial settlement, highlighting the importance of intellectual property in the gaming industry [5][7]. Group 3: Current Challenges in DOTA2 - The DOTA2 scene in China is experiencing a decline, marked by talent loss and reduced sponsorship, with TI prize pools dropping from 40 million in 2021 to just 2.6 million for TI13 in 2024 [8][10]. - The lack of stable sponsorship and the operational challenges faced by clubs, such as LGD, indicate a critical need for revitalization in the DOTA2 ecosystem [10][11]. Group 4: Future Outlook - The revival of "Small Ice Ice Legend" through the launch of a nostalgic version has garnered positive player feedback, suggesting potential for a resurgence in both the game and the DOTA2 scene [5][7]. - The commitment from "Small Ice Ice Legend" to support the esports community reflects a belief in the eventual revival of Chinese DOTA2, as expressed by the game's team [13].

Core Viewpoint - The esports industry in Shanghai is rapidly developing and is now considered to be at a unique level compared to other Asian cities, surpassing South Korea's Seoul and Japan's Tokyo in terms of scale and capability [1][5][7]. Group 1: Event Highlights - The DOTA2 offline elimination tournament held in Shanghai attracted over 3,000 on-site viewers and millions online from May 1-3 [1]. - The upcoming finals for nine esports projects will take place in major venues in Shanghai from May 16-18, showcasing the city's capacity to host large-scale events [3][4]. - The Asian Champions League (ACL) has engaged over 1,000 teams from 32 cities in China for the CS2 project, indicating widespread participation [3]. Group 2: Comparative Analysis - Shanghai's esports infrastructure, including multiple large venues, allows for hosting events that would be challenging in South Korea, even in its largest city, Seoul [4]. - While South Korea had a pioneering advantage in esports, the current level of China's esports capabilities, particularly in Shanghai, has surpassed that of South Korea [5]. - Japan's esports scene is still developing and lacks the depth seen in Shanghai, with a focus on console gaming rather than competitive esports [7]. Group 3: Financial Challenges - The esports industry faces significant profitability challenges, with many events struggling to break even [11][13]. - The ACL's total investment for this year's nine esports projects is close to 200 million RMB, covering various operational costs [14]. - Despite the challenges, the ACL is focusing on building audience reputation and engagement in its first year, with profitability not being the primary concern initially [15].