Better mobile technology, increased use by Chinese youth, and the advancement of 4G in the country resulted in the online and mobile gaming market in China gaining 246% in 2013 over the previous year, said government authorities at a local gaming summit. From the report, during 2013 the market was worth a record $1.84 billion.
Other industry growth reports have been attacked in the past by analysts who claimed that the numbers were inflated. Is it possible that these numbers were higher than the real growth? Yes, but regardless of whether or not the numbers were exactly correct, the growth and largess of the Chinese online gaming market are indisputable. Need more proof? There were 68 million online gamers in China in 2009. In 2014 the number is on track to reach 141 million, according to the research group China Internet Watch. With numbers like these, whether or not the 246% reported by the gaming summit authorities is a little inflated, there is clearly more profit to come from this market.
Three companies worth playing in this market
With a user base of over 2.05 million players, Giant Interactive (UNKNOWN:UNKNOWN) is a leader in the Chinese online gaming industry. With the highest profit margin in the industry at 49%, this company looks strong as it continues to gain on the market's growth. Finally, the company deploys a generous 5.90% annual dividend yield.
However, the company has been in negotiations with one of its board members who has offered to buy the company and take it private. At the time of the initial offer, the shares jumped over 10%. Overall the stock was up more than 111% in 2013. If Giant Interactive does go private and investors can no longer gain from this company, there are still more like it.
NetEase (NASDAQ:NTES) is the biggest player in the market (though not a pure play) with a market cap almost four times the size of that of Giant Interactive. The company was expensive a few weeks ago, but it has declined from $81 to around $71, with a current P/E of just 13, which is down from 17. The sell-off seems like it was caused by reports about overall economic growth in China. However, this company has reported continuing revenue growth, which was up 18% in the third quarter of 2013 over the same quarter last year. The revenue growth, up from the previous quarter as well as year-over-year, comes from both online and mobile gaming.
2014 may be a great year of game releases for NetEase, which has announced continuing development of a 3-D fantasy gamed called Revelations that is set to hit the Chinese market as well as a plan to expand into Korea this year. With 200 employees focused on the project since 2009, gaming analysts expect the game to be a definite industry winner.
By contrast, Perfect World (UNKNOWN:PWRD.DL) is the smallest player in the market. The company is working to prove itself with high growth in the second half of 2013. The company has been gaining revenue by releasing expansion packs for its already well-selling games. The company crushed the estimate of $0.25 in revenue per share by reporting $0.39 per share in the third quarter of 2013.
The company has set a new strategic target regarding games for consoles (as opposed to purely online games). Recently, the Chinese government lifted its longtime ban on game consoles, allowing what should be a rush of game consoles into the country this year. Perfect World hopes to take advantage of this new opportunity to produce mass multi-player online role playing games, or MMORPGs, on consoles such as the Xbox One and Playstation 4.
Doesn't matter exactly how much, clearly the growth is there
Some analysts will be quick to jump on the numbers reported for the 2013 growth of the Chinese online gaming market and dispute their accuracy. It is quite possible that the numbers are inflated, but this doesn't matter. The industry is rapidly growing, and whether or not it is growing by 246% or less is a moot point, since it is obvious that there is enough growth to make these companies attractive investments. What's more important is how well the companies in the market are able to squeeze profits from this growth. There are companies with great positioning for a growing Chinese online gaming market, and more growth in 2014 will help to continue propelling these companies forward.
Bradley Seth McNew owns shares of Giant Interactive Group. The Motley Fool recommends Giant Interactive Group and NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.