(Report producer/author: Essence Securities, Jiao Juan)
1. CMGE: IP-based, focusing on the entire mobile game industry chain
1.1. Development history: Focus on IP mobile game business and continue to improve the IP ecosystem
CMGE was founded in 2009 by Mr. Xiao Jian and Mr. Xian Handy in Shenzhen. In 2012, CMGE Group became independent from First Video Group and was listed on NASDAQ in September of the same year, becoming the first Chinese mobile game company to successfully list in the United States. The company was privatized by the Pegasus Investment consortium in August 2015 and delisted from NASDAQ, and in November of the same year, all the company's shares were acquired by CMGE Mobile Technology to start the mobile game business. In 2018, the company acquired 51% equity of two game developers, Beijing Softstar, and 100% equity of Wenmai Interactive, obtaining control of the company and its IP, IP game strategy ecological upgrade. In 2019, the company was re-listed on the Hong Kong Stock Exchange and was officially included in the Hong Kong Stock Connect in 2020. In 2021, the company acquired the remaining 49% stake of Beijing Softstar for HK$640 million, and acquired all the rights in the mainland region of the IP of "The Legend of Sword and Fairy". In the same year, Bilibili invested 650 million Hong Kong dollars in the shares, accounting for 7.15% of the shares, becoming the third largest shareholder of the company. The company and ByteDance's subsidiary Chaoxi Lightyear jointly launched "Voyager King Blood Route", which topped the App Store free list and entered the best-selling TOP3. In November, the company officially announced its entry into the metaverse, planning to build "Sword World" into the first national style metaverse in China.
Build a mobile game ecosystem based on IP. The company's basic business model is to operate within a mobile gaming ecosystem based on popular IP, which works closely with IP rights holders, game developers, and distribution channels. Specifically, the cooperation methods within the ecosystem include: 1) the company obtains IP authorization from the IP copyright owner and owns its own IP, based on IP, through cooperation with third-party game developers or internal development teams to develop mobile games; 2) Directly represent games from third-party game developers, and work with game developers to optimize games through beta testing and conduct sales and marketing activities before launching the game. continue to operate the game in partnership with game developers and provide player services and technical support after the launch of the game; 3) Publish the game on the distribution channel for players to play, and the relevant channel will also provide player feedback and player behavior data in the game. The company's core role in this ecosystem is IP-based, using different capabilities such as game development, game publishing, marketing and promotion, to ultimately ensure that high-quality mobile games are provided to players, while maximizing total turnover and revenue.
The IP gaming business model has proven to be viable and rewarding. Judging from the release results, the company's IP-centered business model has achieved excellent product performance and successfully launched many IP games. According to the company's official website, the products released by the company with a turnover of more than 100 million yuan in the first month include "The Blood Route of the Sea King", "The Legend of the New Condor Group: The Iron-Blooded Pill Heart", "The Thunder Hegemony of the Legendary World", "Douluo Continent - The Return of the Fighting God", "Chosen Heaven", "All-Star Fight", "Zhenhun Street: Born to be King" and so on.
1.2. Shareholding structure & management team: clear control and stable management team
The shareholding structure is stable and the control is clear. Mr. Xiao Jian, the actual controller, holds 5.80% of the shares of CMGE through the equity owned by CMGE Brothers Limited; Mr. Handy Sin, the co-founder of the company, holds a 4.47% stake in CMGE through an interest in Silver Joyce International Limited; At the same time, Xiao Jian and Xian Handi jointly hold 25.05% of the equity of CMGE Games, the company Fairview Ridge Investment Limited. Zhongrong Trust is the second largest shareholder of the company, holding a total of 13.35%, and Bilibili is the third largest shareholder of the company, holding 7.15%. The management team is experienced and diligent in the industry. Mr. Xiao Jian, Chairman and CEO, is the founder of CMGE Group and has been rooted in the Chinese mobile game industry for more than 10 years. Mr. Handy Sin, Vice Chairman, has over 24 years of experience in corporate management, finance and investment banking. Mr. Yingjie Fan, Executive Director, is the Chairman and CEO of Wenmai Interactive, with more than 15 years of game development experience and is the chief producer of games such as "Dragon City Legend". The core management team has accumulated many years of rich experience in games and related industries, providing a solid foundation for the company's stability and long-term development.
1.3. Financial status: The performance is under pressure due to the version number policy, and the investment and proportion of self-research are increasing
From 2016 to 2021, the company's revenue maintained a good growth trend. In 2018, it acquired 51% of Beijing Softstar and 100% of Wenmai Interactive shares, and since then its revenue has reached 3 billion yuan. In the first half of 2022, due to the failure of a number of new games to obtain version numbers as scheduled, the launch plan was delayed, and the revenue growth rate of some self-developed products slowed down, and the operating income was 1.233 billion yuan, down 43.5% year-on-year. With the normalization of the issuance of the edition number, it is expected that the company's overall revenue will return to the growth track.
From the perspective of revenue structure, the company's revenue consists of three parts: game publishing, game development and IP licensing. Game publishing: the company cooperates with third-party developers to publish games or directly represents third-party games; Game development: the company's studios or companies develop and publish games by themselves, and in recent years, the company has paid more and more attention to self-research capabilities and invested in further improvement; IP authorization: The company launches derivative products and services of licensed IP, such as IP games, IP peripherals, pan-entertainment consumption, offline exhibitions, etc. The game publishing business is the business with the highest proportion of the company's revenue, including a number of long-life cycle blockbuster games, which is the basic disk of the company's business. Game R&D revenue has developed vigorously since 2018, with a significant increase in proportion, and self-developed products have achieved good revenue at the market and word-of-mouth levels. In the first half of 2022, the revenue of game publishing business was 1.020 billion yuan, down 33.1% year-on-year, accounting for 83%; Game development revenue was RMB182 million, down 67.9% year-on-year, accounting for 15%; IP licensing revenue was RMB30.8 million, a year-on-year decrease of 65.0%, accounting for 3%.
Gross margin increased steadily. The company's overall gross margin remained stable, rising from a low of 32% in 2020 to 40.6% in the first half of 2022. The cost of sales of the company's game business is mainly channel commissions. In the first half of 2022, due to 1) the increase in the proportion of overseas business in revenue, and 2) the reduction of operation and maintenance costs of released mature game products, the gross margin in 2022H1 was 40.6%, an increase of 3.4pct compared to 2021, and the adjusted net profit margin was -1.3%, a decrease of 17.2pct compared to 2021. Increased investment in R&D. In the first half of 2022, the company's sales expenses were 115 million yuan, a year-on-year decrease of 49.1%, mainly due to the delay in the launch of a number of games and the decline in promotion expenses; General and administrative expenses increased by 70.0% year-on-year to $313 million, of which R&D expenses increased by 70.0% year-on-year to $204 million, and R&D expense ratio reached 16.6%. The company's R&D investment has been further increased, and its self-research ability is expected to be further improved. The game publishing business is the company's business base, but the company is also continuing to increase self-research, and in recent years, it has continuously increased investment in research and development, and the proportion of game development business revenue has continued to increase. Self-developed products such as "The Legend of Sword and Fairy VII", "City Lord's World" and "Monopoly 10" have achieved outstanding performance, and the company's self-research ability has been further verified.
In 2020 and 2021, the company's net profit attributable to the parent reached a peak, 700 million yuan and 610 million yuan respectively. In the first half of 2022, due to the impact of the edition number, new products could not be launched as scheduled to contribute increments, and the flow of superimposed old products naturally declined, and the net profit attributable to the parent suffered a loss of 20 million yuan. As of the first half of 2022, the company's goodwill balance was 1.137 billion yuan, accounting for 19.4% of net assets. The company's goodwill composition mainly includes: 1) the goodwill formed by the acquisition of CMGE Group, the predecessor of the company, in 2015 of 325 million yuan, 2) the goodwill formed by the acquisition of 100% equity of Wenmai Interactive in 2018 of 698 million yuan, 3) the goodwill formed by the restructuring of Beijing Softstar to become a wholly-owned subsidiary in 2018 of 96 million yuan; 3) The goodwill formed by the acquisition of 51% equity of Hainan Guming in 2022 is 0.02 billion yuan, and 4) the goodwill formed by the acquisition of 51% equity of Shanghai Zhoujing in 2022 is 16 million yuan.
2. Deeply cultivate self-owned and authorized IP, and continue to expand the product matrix
2.1. The core advantages of IP games are low customer acquisition costs and large profit potential
According to Analysys analysis data, from 2016 to 2021, mobile IP games maintained a rapid growth rate higher than the overall mobile games, with a growth rate of 40.43% in 2020 and a market size of 181.87 billion yuan. IP has become the core resource of the game market, and IP games have become the largest segment of the game market. The biggest driver for the rapid growth of the mobile IP game market is the trend towards boutique in the gaming industry. Since 2018, the gaming industry has gradually shifted from being traffic-driven to content-driven. On the one hand, relevant national institutions and industry associations advocate the improvement of game content quality, and mainstream game companies abandon the "one flow" thinking, increase investment in product research and development, develop long-term products and establish IP reputation. On the other hand, the penetration rate of mobile game users peaked in 2018, and at the same time faced with competition for time from emerging content forms such as short videos and live broadcasts, the game industry needs to consider driving further growth from the perspective of improving the depth of payment, and head IP games often have a better depth of payment and a long life cycle.
At the same time, we noticed that the interaction between head games and IP is characterized by trade-offs. On the one hand, IP games account for a higher proportion of head game products. The more head products, the higher the degree of quality. IP is an important element of the boutique strategy, and the proportion of IP games is much higher than that of the overall game. On the other hand, in the head product, the amplification effect of IP on the flowing water is lower. This is because the more boutique the game, the higher the quality of the game itself, and the less dependent it is on IP.
Compared with non-IP games, IP games have relative advantages in user acquisition, version approval, profit potential, global promotion and other dimensions.
User acquisition: IP is well-known, has a wide fan base, and has a stronger ability to "absorb volume"
IP generally has native popularity and objectively has a relatively wide fan base, bringing natural influence to mobile games. According to gamma data, at this stage, the scale of core users of mobile game IP (playing multiple IP games, actively looking for game products based on IP, and having high interest in IP game products) exceeds 150 million, and the scale of pan-users (who have played IP-related products) exceeds 180 million. IP-based gaming products are more likely to attract the attention of IP fan players.
Version approval: IP has a clear world view and mainstream values, and the "approval rate" of version numbers is higher
IP usually has its own story line, character setting, world view, and values, and the IP party usually has requirements for the adaptor to respect the original IP in order to maintain IP reputation. Therefore, IP games cannot deviate from the original IP main line, and IP games generally have basic elements such as a relatively complete story plot and main character portraits. Based on the IP of novels, anime, film and television dramas or other game works, IP games with similar themes have the opportunity to get version numbers more easily and quickly.
High profit potential: IP games have a longer life cycle and deeper payment depth
From the perspective of game categories, MMORPG and CCG are the two game types most suitable for IP adaptation, and these two categories are generally medium and heavy games. Medium and heavy games generally have more advanced gameplay and more complete storylines, and compared with light casual games such as LTG, medium and heavy games will incur higher development costs, deeper payment depth, and longer life cycles.
Global promotion: easy to accept, low promotion cost
Game manufacturers want to promote their products to the world, especially high-value markets such as the United States, Japan, and South Korea, and products with the inherent advantages of IP can be more accepted and understood by overseas players. The upfront promotion cost can also be controlled at a more reasonable level due to the blessing of IP.
2.2. With the support of self-owned + authorized IP, the product matrix continues to be enlarged
The company is the number one player in the field of IP games in China, and has outstanding advantages in copyright accumulation, global distribution and independent research and development of IP games. According to data from Analysys, as of December 31, 2021, CMGE was the Chinese game publisher with the largest number of IP reserves besides Tencent Games. The company has 123 IPs, including 55 authorized IPs and 68 own IPs, including a number of national-level IPs, such as "The Legend of Sword and Fairy", "Xuanyuan Sword" and "Monopoly". The company currently operates a total of 83 games online. According to the company's announcement, as of December 31, 2021, the company's monthly active users and monthly paying users reached 19.1 million (+yoy 3.1%) and 1.4 million (+yoy 1.8%), respectively, ARPPU reached 229.2 yuan, and 117 million new registered users were added in 2021.
Continue to cultivate its own IP represented by "The Legend of Sword and Fairy", "Xuanyuan Sword" and "Monopoly"
The company has 68 own IPs, including well-known IPs "The Legend of Sword and Fairy", "Xuanyuan Sword" and "Monopoly". Among them, the IPs of "The Legend of Sword and Fairy", "Monopoly" and "Xuanyuan Sword" won the gold, silver and bronze awards of game track IP respectively in the "China Annual IP Selection" guided by the Copyright Administration of the Central Propaganda Department and sponsored by the National Copyright Trading Center Alliance in the first half of 2021. In the report "Oriented to High-quality Development: 2017-2018 IP Evaluation Report" jointly released by Wangwang Think Tank and the Organizing Committee of the Beijing Cultural Fair, "The Legend of Sword and Fairy" and "Xuanyuan Sword" were selected as the top 20 in the list of IP value of contemporary cultural products in China.
The "Legend of Sword and Fairy" series is the originator of the fairy theme and has become an unbreakable classic IP. According to the company's announcement, the number of Xianjian IP users exceeds 600 million, and the ratio of men to women is close to 1:1, of which 100 million+ users are core fans, and 500 million+ users are very familiar with Xianjian IP. Post-95s, post-90s, and post-85s account for the highest proportion in fan portraits, followed by post-00s and post-80s. Overall, Xianjian fans have strong spending power, the ability to pay for interest, and high loyalty. According to the company's planning, the planning and design of Xianjian IP is multi-dimensional pan-entertainment fields such as games, film and television, animation, literature, derivative licensing, etc., which penetrates the fan base of Xianjian in an all-round way and consolidates and amplifies the value of Xianjian IP. 2023 will be the year of Xian Jian, including "Xian Jian I", "Xian Jian 4" and "Xian Jian 6" in film and television, "New Sword and Fairy Legend: Swinging Sword Love", "Xian Jian World", "Xian Jian: Origin" and "The Legend of Sword and Fairy: A New Beginning" will be launched within the year. The traffic and word-of-mouth effect brought by the popular broadcast of film and television dramas are expected to feed back the game and help the game achieve better performance.
Reserve world-renowned licensed IP, covering national comics, Japanese comics, literature, and end games
The company has 55 authorized IPs, including well-known national comic IPs "Soul Street", "Hundred Demon Spectrum", "Cup Mo Stop", etc., Japanese comic IP "Sea King", "Dragon Ball Z", "Naruto", "Tutor", "Fairy Tail", etc., literary IP "Douluo Continent", "Chosen Heaven", "Dragon Clan", "Condor Trilogy", etc., Duanyou IP "SNK All-Star" series, "Three Kingdoms", "True Three Kingdoms Matchless", "Hungry Wolf" and so on. The company's authorized IP themes and categories are rich, covering adventure, martial arts, history, fantasy and other genres from the perspective of themes, and covering many categories such as national comics, daily comics, literature, and end games from the perspective of categories. As a strong complement to its own IP, licensed IP is expected to continue to enrich the company's product line and expand the company's user base. "Voyager King Blood Route": "Voyager King" is licensed and jointly produced by CMGE and Chaoxi Lightyear, according to the company's official Weiwei, on the first day of launch, "Voyager King Blood Route" topped the iOS free overall list, and the next day it topped the best-selling game list. All-Star Fight: A strategy card mobile game licensed by SNK, independently developed and distributed by CMGE. The game uses an overhead worldview to bring together multi-IP fighters. The game includes well-known characters from SNK's multiple IPs, such as Fire Dance, Kusanagi Kyo, Yagami-an, Tachibana Youkyo, Nakolulu, Marco Rossi, etc.
"Soul Street: Born to King": The first 3D ARPG action mobile game adapted from the top popular national comic "Soul Street" IP, has a wide influence in the two-dimensional circle. The game performed well, according to the company's official micro-account, the omni-channel new increase exceeded 2 million on the first day of launch, the turnover of all platforms on the first day exceeded 22 million, and the next day rushed to the 4th best-selling list of iOS.
Based on its own and authorized IP, six gameplay tracks are laid out. At present, the company has laid out six major tracks: Card+, MMO, Fusion SLG, Open World, PC Standalone, and Street Basket E-sports. Among them, the representative products of the card + track include "Devouring the Starry Sky", "Douluo Continent Reverses Time and Space", "Breaking the Sky", "New Immortal Sword and Legend: Swinging the Sword and Asking for Love", "My Royal Sword Diary", "Zhenhun Street: Born to be King", "All-Star Fight", "New Three Kingdoms - The Legend of Cao Cao", etc.; Representative products of the MMO track include "Douluo Continent: Shrek Academy", "Ultraman Assemble", "Blood Moon: Order Reforge", etc.; The representative product of Fusion SLG is "City Lord"; Representative products of PC stand-alone include "The Legend of Sword and Fairy VII", "The Legend of Sword and Fairy IV - Remake", "The Legend of Sword and Fairy I - Remake", "Monopoly 10" and so on; The representative product of street basket e-sports is "Codename: Basketball 3V3".
3. Overseas distribution has emerged, and R&D strength has been gradually strengthened
3.1. The results of going overseas are remarkable, and the overseas market brings increment
The company started with issuance and has built strong distribution barriers. The company provides one-stop solutions to game developers including game optimization, monetization and pricing, marketing, distribution and post-launch game operation services, and has been named Apple's Top 50 Global Publishers (Apple Inc (APPLE US)), Tencent's Best Partner Award (Tencent Global Partner Conference) and China's Top 10 Game Operators in 2019 (China Audiovisual and Digital Publishing Association). The company has one of the largest mobile game distribution networks in China, has cooperated with more than 400 third-party distribution channels, including major domestic and foreign application markets and public third-party platforms, mobile phone manufacturers' application markets and social networking platforms, can publish games on all major platforms in China, and has established long-term and stable cooperative relations. The company has long promoted a globally integrated publishing strategy, taking the lead in releasing a series of boutique games overseas. In popular overseas markets such as Hong Kong, Macao and Taiwan, Southeast Asia, South Korea, Europe and the United States, CMGE has established a professional localization team from product operation, marketing, user operation and purchase volume launch. And actively signed the global top head IP, rich product layout. The company has released a number of games such as "The Legend of New Sword and Fairy" and "Xuanyuan Sword Three Mobile Game Version" in Singapore, Malaysia and other overseas countries and regions, including "Candle Man" and "Dream Traveler" and other games that have been recommended by Apple on the home page of the App Store around the world, but the scale of overseas revenue in the past is small, and there have been obvious breakthroughs in recent years.
From the perspective of overseas revenue, the company's overseas revenue reached 459 million yuan in 2021, a year-on-year increase of 7260%. The share of overseas revenue increased from 0.2% in 2020 to 11.6% in 2021. In the first half of 2022, the proportion of overseas revenue further increased to 18.5%. From the perspective of product performance, in 2021, "The Legend of the New Condor Group: Iron-Blooded Danxin" launched in Hong Kong, Macao and Taiwan ranked first on the iOS free list in Hong Kong, Macao and Taiwan, and then ranked first on the best-selling lists of the App Store and Google Play in the three places; "Home Tutor" also won the first place in the free iOS list in Hong Kong, Macao and Taiwan, and won the first place in the App Store and Google Play free list after being launched in South Korea; After landing in Southeast Asia (except Vietnam), "Douluo Continent: The Return of the Fighting God" also won the first place in the Thai App Store free list and the third best-selling list. In the first half of 2022, the ARPG game "True Three Kingdoms" won the first place in the free list of the App Store and Google Play in Hong Kong, Macao and Taiwan, the first place in the iOS best-selling list in Hong Kong and Macau, and the second in the iOS best-selling list in Taiwan. In the month of launch, it won the first place in the free iOS list in Vietnam and the Philippines, and the third place in the iOS best-selling list in Vietnam. "Douluo Continent: The Return of the Fighting God" was launched in Vietnam in March 2022, and in the month of its launch, it won the first place in the free list of iOS fruits in Vietnam and the fourth best-selling list.
3.2. R&D structure to ensure the supply of high-quality products
With the deepening of the trend of quality in the game industry, excellent products have become the focus of competition. The gaming industry is shifting from traffic to content, and only vendors with strong enough content resources can stand out from the competition. On the one hand, the company increases R&D investment to build its own R&D team, mainly studios or subsidiaries such as Mantianxing, Wen Wei Interactive, Softstar Technology, and Continental Competition Network, and on the other hand, binds game developers through cooperation, investment, R&D customization, etc. to ensure the supply of high-quality products. In 2021, the company's self-developed games achieved revenue of 905 million yuan, a year-on-year increase of 23.9%. According to the company's announcement, the average monthly turnover of self-developed mobile games and page games exceeded 73.3 million yuan; Self-developed board games also maintained steady growth, with an average monthly turnover of 36.4 million yuan. The rapid growth of self-developed business is due to the increase in investment. In 2021, the company's R&D investment reached 310 million yuan, a year-on-year increase of 48.9%; The number of R&D personnel reached 624, a year-on-year increase of 30.0%.
The company has completed the construction of the R&D structure, mainly relying on its four R&D studios or subsidiaries. From the perspective of IP and game categories, the four major studios/subsidiaries each perform their own duties, focusing on the tracks/categories they are good at, deeply cultivating core IP, and the product success rate is high. Full of Stars Studio: The main research and development projects are "World of Sword of Immortals" and "SNK All-Star Fight". The core member of the project team of "World of Immortal Sword" is the original team of the former Giant Network Giant Fire Studio, who has participated in the research and development of the "Journey" endgame, and led the research and development of the "Xianxia World" series of end-game and the "Dragon Ball Strongest Battle" mobile game. The producer of "All-Star Fight" has served as the executive director of "Ask the Road OL" and the chief curator of Tencent's "Fairy Tail: Magic Guide Boy". Subsidiary Context Interaction: CEO Fan Yingjie has rich R&D experience in the field of legends, mainly responsible for the research and development of the company's legendary and integrated SLG categories, and has released successful products such as "Thunder Overlord". Subsidiary Softstar Technology: "The father of fairy sword" Yao Zhuangxian is the general manager, and Zhang Xiaoquan, the person in charge of Shanghai, his main works include "A Cat and a Dog", "Xuanyuan Sword", "The Legend of Sword and Fairy" and other series. The main research and development direction of Softstar Technology is PC, console and Switch games based on IP such as "The Legend of Sword and Fairy" and "Monopoly". The team is proficient in Unreal Engine development and is one of the most well-known PC single-player game development teams in China. Subsidiary, Continental Competition Network: mainly responsible for the research and development of competitive products, and its CEO Liu Jingbin was the general manager of the research and development of the Chinese version of Joycity's "Street Basketball" in South Korea. At present, the core product under research is "Codename: Basketball 3V3".
At the same time, the company binds high-quality R&D suppliers through investment, customization, R&D cooperation and other ways to ensure the supply of high-quality products. The company participates in game research and development companies, accounting for between 10% and 20%, the main purpose is to establish cooperative relationships with game developers and bind well-known producers in the industry, so as to obtain a stable and high-quality product supply. In December 2019, the company invested in Lefu Interactive Entertainment, accounting for 13.3% of the shares. Cheng Liangqi, CEO of Lefu Interactive Entertainment, has produced a number of industry-heavy card mobile games, is the chief producer of the "Three Kingdoms of Youth" and "Journey to the West" series, and is a well-known gold medal producer in the industry. Through investment and cooperation, the company has obtained the distribution rights of Lefu Interactive Entertainment's "My Royal Sword Diary" and "Douluo Continent: Reverse Time and Space". At the same time, Mr. Cheng Liangqi also serves as the chief product consultant of CMGE. In December 2019, the company invested in Guangzhou Huanyu, accounting for 9.0% of the shares. The mobile games "Quan Democracy Gong", "Sweeping Westward Journey" and "Seven Heroes for Hegemony" led by Zhang Fumao, CEO of Guangzhou Huanyu have all achieved excellent results on the Tencent platform. Among them, "Seven Heroes" has become the top IP of SLG created in China after 8 years, and according to the official website, the cumulative turnover of the seven heroes page game, seven hero mobile game, seven hero H5 and so on has reached 5 billion.
In June 2020, the company invested in Yifan Interactive, accounting for 19.7% of the shares. Zhuang Yuan, CEO of Yifan Interactive, has been responsible for the research and development of mobile games in Photon Studio since 2012, producing excellent mobile game products such as "National Plane War" and "Three Kingdoms of National Fight".
In addition, as the domestic game market enters the deep water area, in addition to simply increasing investment in self-research business, it is more necessary to explore and create high-quality or long-life games with strong characteristics to enhance competitiveness. Therefore, the company chose to further focus on the five major game categories of numerical orientation, platform direction, gameplay direction, e-sports direction and chess and card direction, and strive to create self-research barriers. In terms of platform games, the cross-platform open-world RPG "Fairy Sword World" independently developed by its Mantianxing Studio has been under development for more than two years and is expected to be launched in 2023. In terms of numerical games, Wenmei Interactive, a wholly-owned subsidiary, reserves a number of integrated SLG games with global themes. "City Lord's World" has a realistic cartoon style and good test data, and is expected to be officially launched in China in 2023, and the domestic version will be exclusively distributed by Sanqi Interactive Entertainment. In terms of e-sports games, the self-developed cross-terminal e-sports project "Codename: Basketball 3v3" was joined and produced by Mr. Zhao Yongshuo, the father of "street basketball", and the core team was composed of Chinese and Korean original team members of the "Street Basketball" project, with rich experience in the development of competitive sports games.
4. Lay out the metaverse platform and reserve AIGC technology
4.1. Games will be where the metaverse and AIGC meet
The widespread adoption of AIGC will drive a major upgrade in game productivity. Games have stronger technological attributes than other content forms and are expected to be the area where all content forms benefit most from AIGC (generative AI). On the one hand, games are more complex than other content, including text, audio, video, 3D, code, pictures and other forms, which means that the adaptability of productivity tools is higher; On the other hand, games are the most emphasis on real-time experience of all content forms, and users' consumption of content in games is continuous and real-time, so the production of game content needs to be as efficient as possible. As the application of AI technology in the field of creative production becomes more mature, it is expected that the wide application of AIGC will greatly improve production efficiency and promote gameplay innovation after entering the game industry.
The gaming industry has been looking for R&D efficiencies, and AIGC will bring true productivity liberation. We believe that the improvement of R&D efficiency in the game industry can be simplified into three stages: procedural generation, AI algorithm assistance, and AIGC in the true sense.
Procedural generation: By setting some procedural rules in the tool to automatically generate game content, the production efficiency is improved to a certain extent, and the perfect tools and processes enable the team to efficiently produce a lot of large-scale and high-quality game content. Procedural generation usually formulates generation rules by observing and summarizing the effects of real-world phenomena, and often simplifies the rules and loses a lot of real details and changes in order to improve efficiency. As a result, procedurally generated content tends to be repetitive and monotonous.
AI algorithm assistance: On the basis of programmatic generation, AI algorithm assistance, computer vision, deep learning and other technical tools are used. AI can handle the complex connections behind rich and vivid phenomena in the real world compared to the simplified rules used by procedural generation, further improving the quality and efficiency of digital content design and production.
True AIGC: At this stage, the role of AI-related technologies in the game development process is still an auxiliary, and it has not yet reached the stage of real AIGC developing games. Once AIGC is truly a game development mainstay, it is expected to replace most aspects except original ideas.
AIGC will foster big innovations in gameplay. From PCs to smartphones, from consoles to VR/AR, iterative upgrades of hardware carriers have always been the most important source of gameplay innovation. This round of AIGC technology change is different from the previous rounds of hardware upgrades, mainly starting from specific game production links to promote game gameplay innovation. We believe that AIGC's innovation catalyst for games is mainly reflected in the two dimensions of new game categories and game personalization. AIGC will spawn entirely new game categories: Spellbrush's Arrowmancer and Microsoft's Flight Simulator as examples, whose innovative gameplay is mainly due to AIGC's real-time content generation. Arrowmancer is an AI-created character RPG that offers virtually unlimited new ways to play. The biggest highlight of the game is that there is no artist, and you can use AI to pinch pieces of paper people. There are only four steps to creation, initial form - determine color (hair color, pupil color) - perfect details - freeze pose. Compared to normal face pinching in other games, the biggest advantage of Arrowmancer is that it has a high ceiling and a style of art that can be chosen. Flight Simulator is a complete world and simulated airplane that allows players to experience a pure core loop – flying an airplane from one location to another. The entire game world relies on Bing Map to build real surfaces, Azure AI AI to create details of things, and Project xCloud cloud services to ensure data interaction.
The game will have thousands of faces in the production mode of AIGC: According to Kunlun Wanwei CEO Fang Han's application of AIGC in the game field, after the game is launched, the plot, map, and levels can be dynamically generated through AIGC, players can enjoy their own unique exclusive plot and characters, a game to achieve thousands of faces, NPCs are no longer simple rules constrained dolls, can make their own reactions to player actions, the playability of game products will be greatly improved.
Evolving from games to the metaverse, AIGC will complete the third piece of the puzzle. From the perspective of multi-dimensional factors such as technology maturity, user matching, and content adaptability, games are an excellent way to explore the Metaverse. First of all, based on highly realistic super 3A games (such as GTA), secondly, the super 3A games are transformed through new technologies (enhancing immersive realism, reachability, and scalability), and then introducing more production and life elements and establishing a political and economic system management system, which is expected to eventually form the Metaverse metaverse. Specifically, the evolution of games to the metaverse can start from improving immersive realism, reachability, and scalability. Among them, the continuous iteration of hardware entrances such as VR/AR, the construction of cloud gaming technology and computing power correspond to the first two evolutionary directions, and the self-evolving content production mechanism corresponding to scalability has also found a solution after AIGC gradually matured. One of the commonalities between the metaverse and games is that both require the construction of a large number of digital assets and the filling of digital content. The metaverse is much larger than the world hosted by games and needs to be online at all times, so the demand for content is geometrically greater than that of the game world. This time, ChatGPT has driven the AIGC Great Leap Forward, and AIGC will complement the third important piece of the puzzle in the evolution of games to the metaverse - the scalability of content.
4.2. Based on the "World of Immortal Sword" layout metaverse platform and explore AIGC technology
At the 2021 results conference, Mr. Xiao Jian, chairman and CEO of CMGE, defined the national style culture metaverse game "Sword World", saying that it will be a strategic game with high profit margins and long life cycle. The metaverse will be the next stage of gaming, shifting from 'games as a service' to 'games as a platform', integrating non-gaming experiences such as virtual concerts, virtual fashion shows, and digital collectibles creation and trading. "World of Swords" is a milestone self-developed product for the company, and for the industry, it is an exploration of the combination of games and metaverses. Mr. Xiao Jian believes that the product already has all the basic core characteristics of the metaverse: cross-terminal anytime, anywhere, immersive experience, virtual identity, strong sociability, free creation, and economic system. and seven characteristics: open world, virtual reality, virtual performance, digital collectible pet, virtual economy ecology, player co-creation, and virtual and real integration.
In the "Fairy Sword Metaverse" plan, "Fairy Sword World" will be a high-freedom (large-scale open-world scene, game range up to 24*16 (384 square kilometers) immersive open-world game based on the IP world view of "The Legend of Sword and Fairy". Through the application of virtual reality VR technology, players can use VR equipment to incarnate virtual characters into the "fairy sword world", travel with good friends, kill demons and remove demons, act chivalrously, interact with every grass and tree in the world, experience the "Royal Sword Flight" in an immersive way, and even become a "fairy sword character" to have an immersive script killing of "true love and real scene". In terms of product content presentation, the big world content is mainly based on stand-alone experience, which helps users generate more immersive emotional links. At the same time, "Sword World" will be a cross-terminal product, supporting cross-platform 5-terminal experience, including mobile, PC, console, cloud and VR five types of platforms, cross-platform support is conducive to the product to attract a wider range of game users and expand potential revenue. Build a national style metaverse platform based on "Immortal Sword World" to explore the combination of games and metaverse. In terms of gameplay content, it mainly includes digital collections, virtual economy, player co-creation, commercial activities, etc. In a separate commercial district, players can build an entertainment and economic ecology by leasing stores and selling digital assets such as game content, skins, and pets created by players. Players are free to create their own content. All the content value generated by players' in-game behavior and UGC creation in the game and community will also be transformed into a "digital asset" of virtual identity. There will be more integration of real scenes and online worlds, such as virtual items being made into physical derivatives, and online and offline concerts being held simultaneously.
The difference between "Fairy Sword World" and other open-world games and metaverses in the industry is that "Fairy Sword World" aims at a huge national style culture user market, with unique Xian Jian IP content blessing, Xian Jian fans and huge traffic of the future Xian Jian IP universe, Xian Jian IP has been linked to strong business cooperation resources, strong game research and development strength and high-quality experience, as well as a perfect UGC content ecology, creator economy and virtual and real symbiotic consumer economy. This is the core advantage of "Fairy Sword World" over similar products. In addition, after the announcement of "Immortal Sword World", it will apply Baidu Wenxin's technology to implement the function of NPC interaction in the game. NPCs can obtain independent character story backgrounds and personal personalities, and freely dialogue with players, NPCs can react according to the set personality, which in turn affects the subsequent plot development of the game. Combined with AIGC technology, World of Fairy Sword aims to provide players with an immersive experience where "everything can interact."
According to the company's official Weiwei, CMGE announced that it has become the first batch of ecological partners of Baidu's "Wen Xin Yiyan" (English name: ERNIE Bot). In the future, CMGE will fully experience and access the ability of Wen Xin Yiyan, and will apply Baidu's leading intelligent dialogue technology achievements in the field of open-world games. This move marks that CMGE has given priority to leading AI technology. CMGE will prioritize internal testing of Wen Xin Yiyan, integrate Wen Xin Yiyan's technical capabilities, deepen cooperation with Baidu in product research and development, standard formulation and other fields, and with the assistance of Baidu's technical team, create joint solutions, strengthen AIGC's competitiveness through technology sharing, training empowerment, joint marketing, etc., and further improve efficiency and optimize player experience in R&D and operation scenarios such as plot interaction, digital human and intelligent NPC, while relying on intelligent interconnection and innovation interconnection to jointly lead the game Reform and upgrading of the theater industry.
5. Investment analysis
Profit forecast: 1) Revenue growth rate: The company's revenue consists of three parts: game publishing, game research and development, and IP licensing. In 2022, due to the impact of the version policy, new products cannot be launched as scheduled, and it is expected that the issuance revenue, R&D revenue, and IP licensing revenue will decrease by 22%, 46%, and 70% respectively in 2022. In 2023, the company has rich reserves of self-developed and agency products, "Xian Jian World" heavy self-developed products will be launched within the year, Xian Jian IP licensed a number of TV series, and it is expected that the distribution revenue, R&D revenue, and IP licensing revenue will increase by 48%, 335% and 130% respectively in 2023. In 2024, the business will develop benignly, and it is expected that issuance revenue, R&D revenue, and IP licensing revenue will increase by 20%, 55%, and 64% respectively. 2) Gross profit margin: The gross profit margin of the three subdivisions of issuance, R&D and IP licensing is different, and it is expected that with the increase of the proportion of R&D and IP licensing in the revenue structure, the gross profit margin is expected to be 33%, 35.5% and 36% from 2022 to 2024. 3) Expense ratio: The sales rate is expected to remain relatively stable with the management rate, with a sales rate of 12.58% and a management rate of 3.43% in 2022-2024. The R&D rate was raised to 15% in 2022 due to the R&D focus of "Sword World", and the R&D rate fell back to 8% in 2023-2024.
(This article is for informational purposes only and does not represent any investment advice from us.) For information, please refer to the original report. ）
Selected report source: [Future Think Tank]. 「Link」