Potential US$44bn overseas revenue for Chinese game developers in 2027E 

Following part 1 of our deep dive into China's gaming sector, we turn our focus overseas, where we foresee material long-term revenue growth opportunities, given the mounting regulatory pressure domestically. In this report, we take a deep dive into the overseas opportunities for Chinese game companies, leveraging ÃÛ¶¹ÊÓƵ Evidence Lab data across major markets, and connect the dots with our global game analysts. We build an interactive model to gauge the potential revenue upside for Chinese game companies' overseas expansion. In our base case, we estimate a US$44bn incremental revenue pool in overseas markets for Chinese game companies by 2027E, similar to the size of China's domestic game market of US$46bn in 2021, implying 16% 2022-27E CAGR from the US$18bn overseas revenue Chinese players achieved in 2021.

Why will Chinese game companies succeed on the global stage?

We think Chinese game developers have competitive advantages overseas, leveraging their expertise in mobile gaming in China, the largest mobile gaming market on revenue globally. ÃÛ¶¹ÊÓƵ Evidence Lab survey data suggests gamers are willing to spend more time on mobile gaming due to mobile games' improved quality and enriched content. We believe Chinese game companies are more competitive than global peers due to:

  1. expertise in mobile game development and in- game monetisation design; and
  2. the large domestic talent pool and industrialised production capacity.

These advantages have translated into Chinese firms’ growing participation in developing the mobile versions of top PC/console game IPs. In the medium to long term, we expect Chinese companies’ increased investments in overseas studios to narrow their current gap in IP creation and gameplay creativity. However, we think global regulations remain a potential downside risk to our overseas revenue estimate.

Overseas expansion could be margin accretive

Despite increased near-term R&D expenses, we expect overseas expansion to be margin accretive for Chinese game firms once critical mass improves. This is due to:

  1. overseas app stores' lower take rate, 15-30% vs 30-50% in China, which we think is the main reason behind the current c10ppt gross processing margin gap between Chinese game companies and international peers; and
  2. operating leverage on R&D expenses, as more games are launched domestically and internationally.