As indicated by the typical company data, the demand for interactive games has been stable and increasing in the past three years. The increased demand has also been driven by macro-economy recovery and larger pool of players brought by expansion of gaming platform into smart phone.

Sector’s Current, Trend, Causes behind trend, and Future

Current and Trend

1. It seems that, while new game release time (console games especially) has impacts on performance of game companies, generally the demand for interactive gaming has been strong and gradually growing in the past three years.

2. Sales’ shifting from physical retail channel to digital retail channel and online service has been apparent as indicated by the fact that there is a more apparent decrease in sales of console software in games stores but in sales of consoles.

3. Demand based on console platform has continued strong and grown and demand based on PC platform has declined (it is more apparent in China market).

4. Demand based on mobile phone has increased quickly. However, mobile game companies have to share growth with their mobile network partners and thus have not been able to fully capitalize the quick growth in mobile game players.

5. The sales’ shifting to digital sales channels, which have usually higher margin, help, to some extent, improve companies’ profitability in the past three years.

6. Demand from emerging market has grown fast driven by the quick increase in demand for mobile products. However, shorter cycle of life in mobile games (thus higher relative costs and lower margin) increases risk for companies’ development failure of mobile games.

Causes behind the trend

1. Generally, the demand for gaming entertainment has been growing driven by macro-economy and income factors. This is particularly true in developing countries.

2. Shifting of sales to digital channels may be consistent with and influenced by the same factors as those behind unfavourable retail industry climate.

3. Increasing popularity of mobile phone gaming may help expand players’ segmentation and bring absolute increase in number of players.

4. The decrease in playing of PC games may be because of users’ shifting to mobile games.

Industry Future

1. As upward trend in this industry continues, companies may be able to continue to see growth in their revenue as macro economy recovers gradually and mobile game increases popular. However, they will also have to facing shrinking players of PC based games.

General Financial Performance of Companies In the Sector

It seems that the demand for interactive gaming products provided by companies in this sector has been strong and increasing in the past several years as indicated by average 5-10% annual growth in organic revenue of typical companies in this sector. Sales’ shifting to digital retail channel and online service has been apparent as indicated by about 12-20% annual growth in digital related revenue. Demand for physical retail products decreased quickly (down by about 20% annually and roughly consistent with growth in digital channel). The growth has also been reflected in mobile platform. Performance in console platform is better than that in PC platform.

Leveraging brought by increase in revenue, lower development costs, and shifting of sales to digital sales channel of higher margin help improve profitability of companies. The typical gross margin is about 62%, SG&A is about 27%, and operating margin is about 19% in 2018. The typical enterprise cash flow/EBI ratio is 83. The average annual increase in EBI/share is more than 40% in the past two years.

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