CHINA/ UNITED STATES China Joy
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HONG KONG/CHINA/ UNITED STATES China Joy VR/AR and game pipeline update Event . We attended China Joy 2016 in Shanghai and hosted an expert conference call with Loonggame. VR took the spotlight at China Joy this year. We sampled a dozen VR hardware and game content, and felt that the gaming experience with most local offerings was not up to expectation. Top Chinese developers are looking abroad for VR tie-ups and are making attempts in VR game development. Most industry participants expect VR will take off likely 1-2 years later when pricing of VR gaming hardware comes down and user experience improves. AR, on the other hand, is less explored among China’s gaming community given the tech hurdle and limitations on game genres. Impact More domestic VR products than ever at China Joy – but of mixed quality . A dozen domestic VR gaming hardware makers such as Moojing, Deepoon, 3Glasses, and VR Fires showcased VR hardware (mostly <RMB2000) and bundled game content vs barely a few last year. Most of the domestic VR Reports: offerings operate a closed eco-system i.e. without opening up to third-party game developers. More than half of the VR games/hardware that we sampled Changyou.com – Pipeline visibility was not very much up to expectation. The overcrowded VR space backed by remains limited (report link) PE/VC capital (raised collectively over RMB1bn in 2015) is becoming a red NetEase Inc - Our expectations of sea due to uninspiring content and hardware experience, in our view. mobile Tianxia (report link) Global VR hardware still top choice of leading Chinese developers . Leading Chinese game developers did not show any VR games at China Joy. China's online gaming weekly (July 15) - Understandably the devices on which these games run, e.g. PS VR, Oculus Rift Pokemon Go in China (report link) (US$399-599), remain a niche premium segment and may not cater to mass players. Most reiterated its partnership with global VR hardware brands and MacVisit: IGG - Lords Mobile growing on investments in the VR field. Netease highlighted its involvement in Google’s VR track (report link) platform DayDream and announced an upcoming partnership with a US-based VR content producer next month. OurPalm has invested in Unity, LekeVR and Tencent - Synergies from Supercell acquisition (report link) 87870 to build a VR-based eco-system. OurPalm highlighted that it is one of the partnering developers/publishers of Sony’s PS VR. Tencent - More than just consumer AR rarely found at China Joy internet (report link) . AR is apparently less of a focus at China Joy. Absence of AR-based hardware and game engine is one hurdle. AR also limits the game play to those NetEase - Our predictions on Ghost & involving high interaction with the real world that may not fit most game Overwatch (report link) genres. On the other hand, FPS and rhythm games are the most popular genres for VR. Incremental updates to the game pipeline Analyst(s) . Tencent showcased its strong line-up of licensed mobile games including Hillman Chan, CFA notably Fantasy Zhuxian, Legacy TLBB and Pocket JX as well as the newly +852 3922 3716 [email protected] Wendy Huang, CFA announced PC title Transformer OL. Netease heavily promoted Minecraft and +852 3922 3378 [email protected] announced the new self-developed PC game Dragon Spirit. Kingsoft focused Joe Yu on its top JX IP i.e. two new game tie-ups with Xiaomi and Tencent. We +852 3922 1160 [email protected] expect Tencent is on track to deliver mobile and PC game revenue growth of Maggie Jiang +852 3922 3328 [email protected] 68% and 11% in FY16, and Netease of 88% and -1% in FY16. 3 August 2016 Outlook Macquarie Capital Limited . Reiterate Tencent and Netease as top picks in the gaming space given leadership in game development/licensing and visibility in the game pipeline. Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie Research China Joy VR/AR at China Joy More domestic VR products than ever at China Joy . VR definitely took the spotlight at China Joy this year. A dozen domestic VR gaming hardware makers such as Moojing, Deepoon, 3Glasses, and VR Fires showcased their hardware and game content vs barely a few last year. We found most of the game content is hardware-specific, i.e. the specifically developed games can only be run on specific devices. Also most brands offered only a handful of VR-based games. A good portion of the VR gaming experience was not very much up to standard, in our view. Game play and graphics were monotonous. Some devices caused discomfort and nausea. Some came with cables hanging over the head of gamers i.e. not wireless. That said, we did come across more mature and solid products, e.g. 3Glasses. Most domestic products on closed eco-system . Most of the domestic VR offerings run, unfortunately, on a closed eco-system. These companies develop both hardware and content on their own. They either don’t open up to third-party game developers, e.g. through SDK, or the third-party game developers lack the interest in developing content for them. It may be premature to draw a conclusion at this early stage, but the overcrowded VR space is becoming a red sea due to uninspiring content and hardware experience, in our view. Global VR hardware the top choice of leading Chinese developers . Leading Chinese game developers did not show any VR games at China Joy. Understandably the devices on which these games run, e.g. PS VR, Oculus Rift, remain a niche premium segment in China and do not cater to mass players at China Joy. Most reiterated its partnership with global VR hardware brands and investments in the VR field. Netease highlighted its involvement in Google’s VR platform DayDream in its remarks and announced an upcoming partnership with a US-based VR content producer next month. Netease has set up 4 labs on VR/AR in Beijing, Hangzhou, Guangzhou for VR content development. OurPalm has invested in VR game engines, content providers and platforms including Unity (game engine), LekeVR (乐客 vr), and 87870 (portal). It is developing a VR-based eco- system. OurPalm highlighted that it is one of the developer partners of Sony’s PS VR. Fig 1 Sony PS VR gaining much traction at CJ 2016 Fig 2 Running game demo from Baofeng Mojing Source: Macquarie Research, August 2016 Source: Macquarie Research, August 2016 AR rarely found at China Joy . AR is apparently less of a focus in China’s gaming society. Absence of AR-based hardware and game engines is one hurdle. AR, by nature merging virtual objects with reality, limits the game play to those involving interaction with real world that may not fit most game genres. On the other hand, VR is a more natural and smooth transition. At China Joy, first-person shooter games and rhythm games were most popular genres for VR. 3 August 2016 2 Macquarie Research China Joy . That said, we do see some good attempts in AR. Hiscene (亮风台) stands out with its more sophisticated AR game engine SLAM. Hiscene is in talks with third-party game developers. Its product is being gradually adopted. Notably Tencent adopts Hiscene’s AR engine in its Olympic torch relay campaign on Mobile QQ. Fig 3 Interaction with AR-based pop band from And.II Fig 4 AR-based shooter game demo from Hiscene Source: Macquarie Research, August 2016 Source: Macquarie Research, August 2016 Company updates at China Joy Tencent – solid licensed game pipeline . In line with the aggressive licensing strategy set out early this year, Tencent presented at China Joy a good list of demos on upcoming mobile games including notably Fantasy Zhuxian (licensed from Zhilong), Legacy TLBB (licensed from Changyou), pocket JX (licensed from Kingsoft; the second tie-up between Tencent and Kingsoft), Contra (IP licensed from Konami), Legend of Sword and Fairy (second mobile game on the same IP from Tencent), and DDT (licensed from 7Road), and more. On PC games, Tencent also showcased its newly announced title Transformer Online, and others in the pipeline including Maple Story 2, Master x Master, Rising Fire, Code: Zero, and the. Netease – Minecraft & “Dragon Spirit” (龙魂时刻) . Minecraft for the first time appeared at China Joy. And Mojang and Netease shared more colour on the upcoming Chinese version. Currently the monetization model is not finalized yet but it will surely be different from the traditional monetization method. It is still a challenge for them to ensure smooth and fun play for Chinese gamers in creative, survival modes and with all types of MODs. Also, it is noteworthy that Netease will continue to serve existing Chinese Minecraft gamers who purchased from Microsoft/Mojang previously. This clears some concerns as to how Netease will have to migrate the existing players onto its upcoming free-to-play version. It now seems Netease’s version and existing one can run in parallel and connect to Netease’s Chinese servers. Chinese elements and content are a must in Netease’s version. MINECON 2016 will take place on Sep 24-25. There will be some showcase on creativity from Chinese players. It is noteworthy that at China Joy Qihoo 360 announced that it has licensed the sandbox game Trove from Trion Worlds in China. Some gamers do compare Trove to Minecraft. Netease announced “Dragon Spirit” (龙魂时刻), a 3D ARPG PC game, at China Joy. The demo released only the core combat system but not yet the other content.