Zhongtai: Game industry growth shifts gears, sector profitability remains at a high level

Zhongtai: Game industry growth shifts gears, sector profitability remains at a high level Zhongtai released a research report stating that domestic game users reached 684 million (2026H1, +0.82%), and 1,708 game licenses were approved from January to October (+26%). Supply is ample, with growth coming more from top new titles and long-term operations. Self-developed overseas revenue was US$5.772 billion in Q3, +15.6% YoY (H1 was +30.2%). The gaming sector's valuation is at its lowest since 2014, while profitability remains at a high level, with new title expenses already recognized upfront in Q3. Zhongtai's key views are as follows: Key points from the 3Q26 quarterly reports Industry growth shifts gears domestic Q3 was +5.1% YoY, while self-developed overseas revenue was +15.6% YoY, maintaining double-digit growth; revenue of 14 A-share sample companies was RMB27.78 billion, a new high for three consecutive quarters, +13.0% YoY; concentrated launches of new titles pushed the selling expense ratio up to 39.5%, with non-recurring net profit of RMB4.74 billion, -6.3% YoY, still the fourth-highest since 2019; contract liabilities were +22.8% YoY, thickening the reserve; the sector's non-recurring PE was 13.3x, the lowest since 2014. (Note: financials are based on 14 A-share gaming companies.) Domestic: from high growth back to steady. 3Q26 domestic revenue was RMB92.522 billion, +5.1% YoY, versus -4.1% in the same period last year, +0.8% combined over the two years, with growth slowing versus the first half; client games returned to +1.3% YoY after high growth in 2025, while mobile was +5.3%. Users reached 684 million (2026H1, +0.82%), and 1,708 game licenses were approved from January to October (+26%). Supply is ample, with growth coming more from top new titles and long-term operations. Overseas: still the main incremental driver, with share continuing to rise Self-developed overseas revenue was US$5.772 billion in Q3, +15.6% YoY (H1 was +30.2%); among Sensor Tower's global TOP100, Chinese developers' share rose from 35.0% to 42.0%. The sample's overseas revenue was +44.7% YoY in 2026H1, with the overseas share rising from 37.2% to 44.0%. Attention should be paid to RMB appreciation (USD terms +9.4%, RMB terms +4.1%) and rising user acquisition unit prices. Financials: expenses upfront, profit deferred Q3 added RMB3.20 billion in revenue YoY and RMB2.69 billion in new selling expenses, mainly upfront spending on long-cycle new titles; operating cash flow/revenue was 19.9%, within the normal Q3 range of 18%23% from 20202024 (3Q25 was a high of 29.0%); contract liabilities were RMB8.32 billion, +22.8% YoY, higher than revenue growth, providing a reserve for revenue recognition in subsequent quarters. Valuation: profitability at a high level, valuation at the bottom The pure gaming sector (15 A-share companies with gaming revenue accounting for more than 50%) had a non-recurring PE of 13.3x, the lowest since 2014. In the 6 historical periods when PE was below 24.8x, 4 were followed by gains one year later, with a maximum loss of 29% after buying; the two that did not rise (2018: -3%, 2021: -8%) were both followed by profit declines of more than 30% over the next year. Risk warnings: risk of product launch delays; risk of product launch performance falling short of expectations; industry policy and regulatory risks; risks related to forecast assumptions and data statistics; risk of untimely updates to information used in the research report.