China Securities Co.,Ltd.'s 2026 Investment Outlook for the Gaming Industry: Strong Supply and Demand Drive a High Prosperity in the Gaming Industry, Opening up a Pathway for Profit Margin Growth.

China Securities Co., Ltd. releases research report that the gaming industry will see high prosperity driven by strong supply and demand in 2025, and the prosperity and profit margins are expected to continue to rise next year. With the growth in the number of game approvals (up 23% in the first 10 months of 2025), Tencent (00700), NetEase (09999), and miHoYo are releasing new games frequently. Medium-sized companies are innovating new categories (such as SLG + elimination, creative chess games, emerging female-oriented games, etc.) with potential for growth. Weak channel bargaining and AI-driven user acquisition, along with the growth in the number of game approvals, will continue to drive profit margins higher. In addition, based on the progress of AI described by various gaming companies in their financial reports, AI has been widely used in the entire process of game development and operation, and is expected to enhance the efficiency of game development and operation. Key Points by China Securities Co., Ltd.: Gaming: High prosperity, rising profit margins, continuous focus on integrated categories The industry is driven by high prosperity with strong supply and demand in 2025 The gaming industry has seen high prosperity this year, with the market reaching nearly 20% growth on a scale of billions in the first half of the year. In the first half of 2020, the demand for online leisure and entertainment increased as users spent more time at home, leading to a 30% year-on-year increase in the scale of domestically developed online games in China to 120.1 billion yuan. In the first half of 2021, although hit games like "Genshin Impact" contributed to growth, the growth of domestic gaming users slowed down (0.22% in 2021), and with less time spent at home, the growth rate of the gaming market in the first half of 2021 slowed down to 8.30%. Following factors like restrictions on minors for anti-addiction and control over game approvals, the scale of the gaming market is expected to decline slightly in the first half of 2022, 2023, and 2024. 1. Supply side: Doubling of monthly game approvals in the past two years, innovative new games continue to emerge In terms of the number of game approvals, this year has seen an abundance of supply, with a 24% year-on-year increase in game approvals issued from January to October. From January to October this year, a total of 1441 domestic and imported game approvals were granted, which is a 24% increase compared to the same period last year. Among them, the cumulative number of domestic game approvals reached 1354, a 26% increase year-on-year. The monthly number of domestic game approvals has shown an overall upward trend, peaking in August at 166, marking a new high since the restart of game approvals in April 2022; while the monthly number of imported game approvals stayed around 10, with the frequency of game approval issuance shortened from once every two months last year to once a month. In terms of approval processing time, the fastest approval time has been shortened to within 3 months this year, making the approval process more stable and predictable. Game approval applications need to go through three major steps: preparation and submission of application materials by publishers, approval by provincial news publishing bureaus, and approval by the State Administration of Press and Publication. Previously, there were two rounds of game approval suspensions, one in the 2018 institutional reform and the other in 2021-2022, with a large number of game approvals applied for in the 2019-2020 period, resulting in longer approval times in 2021-2022. Since 2023, driven by factors such as a slight decrease in approval application intentions, basic depletion of previous accumulations, and optimization of the approval process by the General Administration, the approval time has been shortened to within a year. The fastest approval time this year is within 3 months, and the approval process is more stable and predictable, allowing game companies to carry out game launch preparations in a more rhythmic manner. Policy support is also continuously increasing. Since the beginning of this year, favorable gaming policies have been introduced, including tax relief for cultural outbound activities, support for culture as a powerful influence, and simplification of industry policies and approval procedures at the local level. 1) At the national level, in April, three consecutive measures were introduced to support game development, including the issuance of the "Internet Publishing Technology Innovation Leading Plan" by the State Administration of Press and Publication and others to support companies, implement tax incentives, and support IPOs/mergers/re-financing; the magazine "Seeking Truth" published an article on accelerating the construction of a cultural power, mentioning the successful overseas expansion of some Chinese literary works, online games, and TV dramas in recent years, demonstrating the power of Chinese culture; on April 21, the State Council Information Office held a press conference to introduce the "Comprehensive Pilot Program for Expanding Opening-Up in the Service Industry," which mentioned the development of game overseas businesses and the layout of the industrial chain from IP creation to game production, distribution, and overseas operation. 2) At the local level, in May, Guangdong issued a series of policy measures to promote the high-quality development of the gaming industry in Guangdong, including support for games with good cultural dissemination, the creation of an overseas industry cluster, and support for the diverse transformation of game IPs; in June, Zhejiang issued a series of measures to support gaming overseas, including actively fostering market entities for gaming overseas and supporting the development and cooperation of original quality games; in July, Shanghai proposed a policy pilot for foreign gaming companies to develop and launch gaming products in Shanghai that would be treated as domestic games with the potential to accelerate the launch of self-developed games by foreign companies in the domestic market. 2. Demand side: Games can capture users' time and attention effectively Time dimension: Games can satisfy users' various leisure and entertainment needs, whether it's short, fragmented periods of 5 minutes or less, or longer, more immersive entertainment demands of over an hour. With a wide range of game categories and product forms (such as casual games, apps, console games, etc.), games cater to users' diverse leisure and entertainment needs. 1) Short, fragmented periods of about 5 minutes: WeChat mini-games. According to the WeChat Public Course, the duration of a single mini-game session is 1-3 minutes. 2) Moderate entertainment demands of about 20 minutes: MOBA, shooting, and idle games represented by "Honor of Kings" and "Delta Force." Different modes of "Delta Force" have a single-game duration of around 20 minutes, with "Dominance Encounter" and "Flash Attack" on mobile lasting 18 and 12 minutes respectively, while PC versions last for 24 and 15 minutes respectively. The standard and ranking modes of "Unyielding Covenant" on mobile average 20-30 minutes per game, while the quick mode and practice mode only require 10 minutes per game. 3) Medium-to-long entertainment demands of about 40 minutes: Strategy and SLG games represented by "Gold Digging Battle" and "Three Kingdoms: Moulding the World." The duration of a single game in "Gold Digging Battle" is controlled at 35-40 minutes. "Kingshot" requires approximately 30-60 minutes per day for alliance activities, resource raiding, and hero development. 4) Deep entertainment demands of over an hour: Heavy PC and console games like "Black Myth: Wu Kong." In June 2025, Mr. Ren Zhiguo, General Manager of the Tencent IEG Aurora A1 Studio, mentioned that PC and console game users spend 3-5 hours online per day, which is twice as much as mobile game users. Desktop games often offer more complex gameplay and plot settings to meet the leisure and entertainment needs of users with more time and immersive requirements. Compared to other forms of entertainment, games offer higher freedom. Compared to pre-produced entertainment content like short films, movies, TV shows, music, etc., games offer more freedom, engagement, and immersion. This is partly due to the wide range of game categories, covering leisure and entertainment needs ranging from minutes to hours; another reason is that within a single game, different gameplay modes can cover different lengths of entertainment time. For example, "Peacekeeper Elite" has generated more than 10 different gameplay modes, with the quickest being the speed showdown in the entertainment mode, lasting only 8 minutes per game; while classic modes like Gold Island, Rainforest, and Desert maps in the classic mode range from 10 to 36 minutes per game, showing a wide range of time spans. The company expects that in the first half of this year, the time users allocate to gaming has increased. With limited user attention in the era of capped internet traffic and limited time, different forms of entertainment need to compete for users' limited attention. The competition between games and other entertainment forms is most notably reflected in the percentage of time allocated to games by users. The company expects gaming time to account for a higher percentage in the first half of this year compared to 2024, for two main reasons: the gaming market saw nearly 20% growth in the first half of the year while the growth rate of gaming users was less than 2%; with payment rates and user base stabilizing, more time spent on gaming can lead to more traffic and market size; and both classic games and new games have outperformed expectations in the first half of this year. Among classic games, "Honor of Kings" and "CrossFire" saw record revenues in the second quarter for mobile gaming, "Identity V" hit a new revenue high in the first quarter, and the new mode "Subway Escape" in "Peacekeeper Elite" achieved 37 million daily active users over the May Day holiday (with a daily active penetration rate of nearly 50%), all driven by high-frequency updates and new gameplay appealing to old users. In terms of new and emerging games, titles like "Delta Force," "Supernatural Task Group," and "Scepter Legend" have shown strong performance, acquiring increased time allocations. Payment dimension: Games cover a wide price range from a few yuan to over ten thousand yuan, catering to users with different consumption levels. With a diverse range of game types and a broad coverage of price ranges, games cater to diverse levels of consumer entertainment needs. For example, daily average revenue per user (ARPU) for elimination, gambling, and casual competitive games is generally less than 1 yuan, while ARPU for shooting and MOBA games is in the range of 1-2 yuan, and ARPU for RPGs, SLGs, and simulation management games is concentrated at 4 yuan and above. At the same time, the upper limit for game payments is also high, with the cost of rare generals in "Three Kingdoms" reaching over 10,000 yuan. In comparison, online TV series and music may have lower prices but less immersion, potentially unable to meet the entertainment needs of some high-end users; while offline travel, concerts, movies, and murder mystery games have higher time and money costs, they may not be able to meet the needs of users seeking value-for-money options. According to data from the Game Committee, single-user game revenue has increased by 13% year-on-year in the first half of this year. Based on actual sales revenue and user size of the domestic gaming market in the first half of the year, single-user revenue reached 248 yuan, up 13% year-on-year, setting new highs in both absolute value and growth rate for the same period since 2021. The company believes that the core driver of this growth is the increase in user time spent on games, with users willing to allocate more budget for leisure and entertainment towards games. More new supply in 2026, richer integration of categories The company believes that the supply will continue to improve in 2026. Looking back at the hit new games in 2025 (Delta Force, Supernatural Task Group, Scepter Legend), most of them obtained approvals in 2024 or earlier, and with the continuous increase in the number of game approvals from January to October 2025, these approvals are expected to drive continued growth in 2026 and beyond. Improved profitability of listed companies, stronger project momentum, higher quality In the first three quarters of this year, the gaming industry saw high prosperity, driving significant growth in revenue, profits, and cash flow for gaming companies. Looking at the overall situation of the Shenzhen Gaming Index component stocks, the revenue growth in the first three quarters of this year were 22%, 22%, and 29% respectively, setting new highs in both absolute value and growth rate since 1998; while the growth rates of net profits attributable to shareholders increased by 49%, 104%, and 112% respectively, with sales and research and development investment being relatively restrained, the growth in revenue did not come at the expense of profits. In terms of individual stocks, ST Huatong achieved profit growth of over 100% in the first three quarters, and Giant Network Group and G-bits Network Technology showed increasing profit growth quarter by quarter. After team adjustments over the past two years and accumulation of performance this year, gaming companies have stronger project momentum and higher quality. 1) Various gaming companies are gradually establishing advantages in specific areas, leading to higher success rates. In 2024, Tencent's Senior Vice President Ma Xiaoyi publicly stated that projects that can only rank in the top ten within a category will never have the opportunity to challenge the first or second place. These projects are only about short-term revenue and are not worth pursuing. By the end of 2024, G-bits Network Technology also emphasized focusing on top projects and resource allocation, aiming to build high-quality products, with plans to have at most one major new project ("Gyro Game") per region. Additionally, the companies are also focusing on specific categories; for example, Kingnet Network is focusing on MMORPG games based on IPs, G-bits Network Technology is focusing on idle MMOs and SLGs, and 37 Interactive Entertainment Network Technology Group is focusing on MMORPGs and SLGs. With these changes, the success rate of gaming projects has significantly improved, such as "Supernatural Task Group" by Giant Network, which was a new project started in the first quarter of 2024. 2) In the third quarter of this year, leading gaming companies have seen significant growth in research and development expenses, and the company predicts that team expansion is a major driver. Three companies, ST Huatong, Giant Network Group, and G-bits Network Technology, have seen research and development expenses reach 760 million, 340 million, and 280 million yuan respectively in the third quarter, with increases of 260 million, 130 million, and 100 million yuan compared to the second quarter, with growth rates of over 45% year-on-year. The company believes that the increase in research and development expenses is due to the high growth in game revenue, and the expansion of the companies' research and development teams. With new teams in place, there are more possibilities for new products from each company. Continual rotation of integrated categories, optimistic about revitalizing genres like the ones in 2026 The gaming industry has always shown patterns of category rotation. Since 2020, games like "Genshin Impact" and "Honkai Impact 3" have popularized the two-dimensional game genre. In 2022-2023, party games like "Egg Party" and "Star of Yuan" have risen to prominence, while genres like FPS, SLG, action games, and horror were the key themes in 2024-2025, with high-profile games like "Identity V," "Supernatural Task Group," and "Delta Force" embodying one or more of these characteristics. In 2026, the focus will be on the rotation of innovative categories, including Tencent's "Among Strangers," NetEase's "Endless" and "The Sea of Forgottenness." The new focus will be on integrating RPG with IPs, creative chess games like Bilibili's "Three Kingdoms Hundred Generals," and female-oriented action games like BaiAo's "Code Bang Bang." Profit margin trend is on the rise, with new dynamics in marketing, distribution, and development Marketing: Traditional user acquisition is declining, while content/community/live stream marketing is on the rise Game advertising has diversified, and the share of content/community/live stream marketing has increased. With the continuous rise in traditional user acquisition costs and stricter control over ROI in buying advertising, traditional user acquisition is decreasing, while the share of content/community/live stream marketing is increasing. Although there is no accurate third-party data on the budget allocation of different marketing methods, the trend can be verified from three aspects: 1) Community platforms like TapTap and Huya have shown better-than-expected performance, reflecting that gaming budgets are increasingly shifting toward gaming community platforms. TapTap's information ads and Huya's live streaming have higher ROI than traditional user acquisition, primarily due to their ability to accurately target gaming audiences, leading to reduced inefficient spending and higher conversion rates. In the first half of the year, TapTap saw record revenue of 1.01 billion yuan, up by 38% year-on-year, also marking a new high since 1998; while Huya's live streaming revenue of 1.15 billion yuan in the second quarter demonstrated positive growth despite the off-season. 2) The growth in mobile gaming has accelerated this year, but the growth in ad spending has slowed significantly. The number of planned mobile game ad placements in China increased by 22% year-on-year in the first half of the year, only slightly higher than the 17% growth rate of the mobile gaming market. In some months, the market size growth even exceeded the growth rate of ad placements, a significant difference from the situation in 2023-2024 where ad placement growth rates surpassed game market size growth rates by more than double. This indicates a decrease in the share of traditional user acquisition. 3) Some gaming companies have significantly reduced their sales expenses, driving profit growth. Compared to traditional ad spending, new marketing methods like KOL partnerships and content marketing have lower initial capital requirements. This year, companies launching new games have not seen a significant increase in sales expenses, indicating a shift to new marketing strategies. Additionally, some companies that focus on operating older games have managed to reduce their sales expenses through spending adjustments. For instance, 37 Interactive Entertainment Network Technology Group launched its new games "Time Explosion" and "Heroes Have No Flash" in the second quarter of the year, with reduced marketing expenditures, resulting in a decreased sales expense ratio of 47%, down by 8 percentage points year-on-year, and by 10 percentage points quarter-on-quarter; in the third quarter, the sales expense ratio dropped further to 45%, down by 12 percentage points year-on-year, and by 2 percentage points quarter-on-quarter. Despite no major new product launches in the second and third quarters, the net profit of these companies has maintained a growth rate of over 20%. In the first half of the year, TANWAN saw its sales expenses decrease by 63% to 840 million yuan, with a sales expense ratio of 42%, down by 29 percentage points year-on-year, resulting in a turn from a loss of 38 million yuan in the first half of 2024 to a profit of 65 million yuan in the first half of this year. Ultimately, for gaming companies, bypassing traditional distribution channels are expected to significantly increase profitability. With zero revenue share on the gaming platform TapTap and official game websites, and revenue share rates of