Tencent

Games Strategy
2020

Asia Games Market Intelligence: NetEase Games Strategy

Profile

Tencent is a Chinese technology conglomerate founded in 1998. It is one of the top 10 public
corporations globally, by market cap, and is one of the world’s largest venture capital and
investment firms. Tencent’s success is at least partially attributable to WeChat and QQ, which are
two of the largest social messaging platforms globally (despite being used primarily in China). It is
also the largest gaming company in the world by revenue, having generated games revenue of
$20.2 billion in 2019. Tencent Games was founded in 2003 – we at Niko Partners like to say that
since we were founded in 2002, we have been analyzing the games market in China longer than
Tencent has had a Games division.

Tencent has solidified its position as the #1 games developer and publisher globally, primarily
through success in its home market of China where it ranks as both the #1 mobile and PC game
publisher by market share. The company has refined its internal development operations,
marketing and publishing capabilities to successfully launch self-developed and licensed games in
China. The company has also enhanced its portfolio of games, primarily through investments in
more than 80 games companies globally. Part of this involves investment in global game
development and publishing capabilities to further extend its presence outside China, focusing
primarily on self-developed titles based on original or licensed IP.

No new “wow” elements for the 2020 strategy:

1. Strengthen self-development capabilities in China and overseas
2. Continue to work with partners to strengthen games pipeline in China and overseas
3. Build a pipeline of games that can be operated globally

In this report we examine Tencent’s strategy to grow its gaming business in 2020 and beyond.

Asia Games Market Intelligence: NetEase Games Strategy

Tencent H1 2020 earnings

Tencent had a strong H1 2020 with total company revenue reaching $31.49 billion, up 27.9% YoY.
The online games segment was the fastest growing segment, in line with expectations, but also
boosted by COVID-19 lockdowns which led to increased engagement and spend across digital
games as people moved from real world activities to virtual world activities. While Tencent also
saw robust growth from its social network services, online advertising and payment / enterprise
segments, this report will primarily focus on Tencent’s gaming segment and its future outlook.

Tencent financials for H1 2020

Revenue +/- % Operating Profit +/- %

RMB 222.95 billion + 27.9% YoY RMB 51.25 billion + 34.0% YoY
($31.49 billion) ($9.7 billion)

Tencent Gaming segment for H1 2020

Segment Revenue +/- %

Online Games (Total) RMB 93.45 billion + 35.6% YoY

($13.20 billion)
- Mobile Games RMB 70.74 billion + 63.0% YoY
($9.99 billion)
- PC Games RMB 22.71 billion - 11.0% YoY
($3.21 billion)

Tencent’s online games revenue, including games distributed via social network services, accounts
for approximately 42% of the company’s total revenue. Tencent online games segment exceeded
expectations this year, returning to growth rates not seen since 2017. While new game launches
did help boost revenues in the first half of 2020, we note that the majority of growth was driven
by increased spend in existing titles, with the impact from COVID-19 playing a large role.

Mobile games revenue grew significantly during H1 2020, primarily driven by growth from
domestic games such as Honor of Kings and Peacekeeper Elite, as well as overseas games such as
PUBG Mobile and Clash of Clans. The global lockdowns related to COVID-19 led to increased
engagement and spend in digital games. In our April 2020 online survey, 97.2% of the survey
respondents reported spending more hours on mobile games than prior to the pandemic. 88.8%

Asia Games Market Intelligence: NetEase Games Strategy

of respondents said that they preferred playing legacy titles or games that they had played before,
opting for familiarity.

PC gaming revenue continued to decline, in line with trends from the prior year. The decline is
primarily attributable to a lack of new online game releases, weaker performance from some
legacy titles and the impact of COVID-19 on internet cafés. While there was an increase in home
PC gaming, icafes were shut (all 125,000 in business prior to the pandemic), eliminating the
gameplay from there by the 115,000,000 gamers who frequent them. 57% of respondents who
use icafes said that they do not intend to return once they have reopened.

50,000 Tencent PC + Mobile game revenue
45,000
40,000 Mobile Games

35,000 PC Games
Million RMB

30,000
25,000
20,000
15,000
10,000
5,000
-
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020


While Tencent is seeing record growth this year, one overall trend has become clear: the company
has shifted from one that excelled in PC online games to one that now generates more than 75%
of its online game’s revenue from mobile games. While this is not too dissimilar from NetEase, the
second largest games company in China which derives 71% of its online games revenue from
mobile games, NetEase has been able to successfully buck the industry trend of declining PC game
revenues. This is something Tencent has been unable to do. Riot Games and its League of Legends
IP has continued to perform strongly for Tencent, but its other self-developed and licensed PC
games have declined in revenue, not to mention the company has only released a handful of new
PC games in the past two years.

Tencent has heavily invested in its mobile game development capabilities over the past few years
and has produced domestic hits based on both owned and licensed IP. While its overseas presence

Asia Games Market Intelligence: NetEase Games Strategy

has been bolstered by its investments in global gaming companies, Tencent has also released self-
developed games overseas such as PUBG Mobile and Call of Duty Mobile, which buoy existing
mobile games from majority-owned Supercell, including Clash of Clans. Approximately 25% of
Tencent’s game revenue is generated outside China and the company plans to grow this to 50%
over the next few years. To do this, the company plans to reinvest in the PC games space and is
also looking to explore console games.

Tencent also held its annual UP gaming conference in June where it announced 36 new titles
planned for China. The company unveiled a diverse portfolio of games based on owned and
licensed IP as well as self-developed and third-party games. This event was purely focused on the
domestic market.

The full list of games shown is below and notable titles are referenced throughout the report. The
following sections will look at key trends regarding Tencent and how they will shape the future
direction of the company.

Game Platform Developer / License / Distributor Genre

Mandarin Town Mobile Tencent Serious Game
Chang Hen Ge in the Painting Mobile Tencent Lightspeed & Quantum Serious Game
Health Defense Mobile Tencent NExT Studios Serious Game
The Great Ruler Mobile Tencent Timi MMO, PVP
Metal Slug Code: J Mobile Tencent Timi (Licensed from SNK) Arcade Fighting
The Legend of Qin World M Mobile Tencent MMO
Love of Light and Night Mobile Tencent Aurora ACG / Dating Sim
Under the Great Plan Mobile Archosaur Games Strategy
Dream New World Mobile Archosaur Games Turn-based MMO
The Heart of Noah Mobile Archosaur Games RPG
Once Upon a Time in Lingjian Mountain Mobile Tencent MMO, ACG
The Monster List Mobile Tencent Tower Defense, ACG
Komori Life Mobile Zorro Network Simulation, ACG
Street Fighter: Duel Mobile Topjoy (Licensed from Capcom) CCG-Fighter
Dynasty Warriors Mobile D.W.Studio (Licensed from Koei Tecmo) Hack and Slash
Walnut Diary Mobile Emoji Girl Idle, Simulation
Bit Big Bang Mobile Gameley Roguelike, Shoot 'em up
Tetris World Mobile Changyou / Tetris Company Puzzle
My Knight Mobile Esoul / A.C.E Program RPG
GRIS Mobile/PC Nomada Studio / A.C.E Program Adventure/Puzzle

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Spiral Storm Mobile Tencent Next Studios / A.C.E Program CCG Battle
METAL REVOLUTION Mobile Tencent Next Studios / A.C.E Program Action Fighter
Art of War Mobile iDreamsky / A.C.E Program RTS
Dragon Nest 2 Mobile Shengqu Games MMO
Qing Yu Nian Mobile Shengqu Games MMO
Code: Three Kingdoms Mobile Tencent CCG
MU Miracle 2 Mobile Tianma MMO
King of Conquest Mobile Locojoy Strategy
My Planet Mobile Tencent Sandbox
Ylands Mobile/PC Bohemia Interactive Sandbox
Wo Long Yin 2 Mobile Kingsoft Strategy
Xuan-Yuan Sword 7 PC Soft Star / WeGame ARPG
Neon Abyss PC Veewo Games / WeGame Side scroller
Swordsman II: Wandering the World Mobile Dream Game Studio Open world
Dungeon & Fighter Mobile Mobile NEOPLE 2D Fighting
Code: SYN PC/Console Tencent Lightspeed & Quantum FPS Open world


Tencent has strong development, operations and publishing capabilities

Tencent’s plays a part in every stage of the value chain:

• IP created and owned by Tencent Games, Pictures and Literature
• Internal game studios, including TiMi, Lightspeed & Quantum, More Fun, Aurora, NExT and
others that have created games based on owned IP
• Acquisitions of external studios such as Riot Games and Supercell
• Self-developed back-end game and cloud solutions that enhance game operation
• Owned distribution, marketing and payment channels such as QQ and WeChat that reach
over 1 billion users in China + Tencent MyApp, an Android store and WeGame, a PC game
store
• Owned platforms and operations including game livestreaming platforms and esports
operations to help support the growth of its game business
• Key investments and business cooperation with 8 of the world’s top 10 game companies,
live streaming platforms, esports operators, social media and more

Tencent’s thrives because of excellence across game development, game operations and game
publishing. It plays in every stage of the value chain. Not only has this helped Tencent’s self-

Asia Games Market Intelligence: NetEase Games Strategy

developed games, its vast reach to Chinese consumers has made Tencent the #1 partner choice
for foreign and local developers in China. We anticipate continual improvements to maintain the
#1 position and growth internationally.

PC to Mobile Game adaptations

Tencent began building internal game development capabilities in the mid 2000’s, focusing on
desktop and PC games distributed via its QQ social media and chat platform. The company
leveraged the popularity of QQ in icafes for PC hits QQ Speed, QQ Dancing and QQ Huaxia. As the
PC game market matured in China, the company utilised a PC to Mobile game adaptation strategy
to extend the lifecycle of these owned IP.

QQ Speed Mobile, which released at the end of 2017, has been a hit for the company, generating
more than $1.5 billion across Android and iOS in its lifetime according to Sensor Tower and Niko
Partners estimates. Tencent has been able to demonstrate that it can develop new original IP,
successfully operate those games on PC, then extend its success to mobile. We expect Tencent to
continue this strategy over the next few years for its owned IP, with games such as Moonlight
Blade Mobile set to launch this year. There are also PC to Mobile game adaptations based on
licensed IP set to launch soon including DnF Mobile and Street Fighter Mobile that will further
grow revenues.

Tencent’s internal studios chase new trends and genres

After the success of MOBA games on PC, Tencent looked at whether the company could create its
own MOBA game that could succeed in the mobile space. Tencent’s Lightspeed & Quantum studio
created We MOBA while TiMi created Honor of Kings. We MOBA did fairly well at the beginning,
but the choice was made to invest more in HOK because it was clear that players preferred the
game.

When battle royale games grew in popularity, Tencent acquired the license to develop a PUBG
mobile game and assigned its TiMi and Lightspeed and Quantum studios to develop a game each.
In this case it was Lightspeed and Quantum’s game that won out and became the core version of
PUBG Mobile globally. Lightspeed and Quantum also publishes a custom version of this title in
China under the name Peacekeeper Elite, as it was denied a required ISBN to publish PUBG Mobile
itself. Most recently, Tencent took a similar approach to its entry in the auto battler genre,
developing its own game called Chess Rush that competed with Riot Game’s (owned by Tencent)
Teamfight Tactics.

Asia Games Market Intelligence: NetEase Games Strategy

Hedging the bet with multiple options per genre lessens the risk of failure, but drives up
development, licensing and marketing costs. Tencent has also relied on its investments and
business partnerships to further augment its pipeline in this regard. We anticipate the company to
pursue this strategy as new genres and trends develop. To point, they announced 6 MMO games,
3 strategy games, 3 CCG games, 2 sandbox games and 2 simulation games at UP in June.

Investing in core games with social experiences

Tencent is investing heavily into more immersive and complete mobile games to drive
engagement and spend from discerning gamers. Tencent continually refines its games by
operating them as a live service, optimising each game over the long term with new content
updates, game modes, items and monetisation methods. For example, QQ Speed is more than just
a basic racing game, with multiple PvP and PvE modes, character customisations, in game social
elements, recurring live events and more.

There has been experimentation of blending game modes and monetisation methods across
genres to keep players attached to an IP, even when they are interested in a new title. For
example, Honor of Kings added battle royale and auto battler modes into the MOBA game.
Peacekeeper Elite has added in new social experiences in games, including virtual concerts. Battle
passes, which drive additional spend, are added across many of its popular titles.

Tencent has proven that core games can work on mobile and we expect Tencent to scale these
experiences across multiple platforms in the future to reach an even broader audience.

Tencent publishes titles from both local and global developers in China

We have already discussed how Tencent works with 8 of the top 10 global game companies in
China. A newer business strategy is to work with medium to large sized Chinese developers to
publish their games domestically, even if they already have a publishing unit themselves. Examples
include Perfect World Entertainment, Shengqu Games, Yoozoo, Changyou, Kingsoft/Seasun,
Kingnet and Archosaur Games. Even with Tencent taking a cut of revenues, the developers expect
to see higher revenues overall due to Tencent’s expertise in publishing, operations and marketing,
as well as the ability to fully integrate with popular Tencent platforms such as WeChat and reach
hundreds of millions of users that way.

Tencent already has a key partnerships with global developers to localise their titles in China,
however the one thing getting in the way of further growth from this strategy is the regulatory
environment in China. While there were 185 foreign games approved in 2019, of which 17 were
published by Tencent, there have only been 55 foreign games approved in 2020 year to date. We

Asia Games Market Intelligence: NetEase Games Strategy

expect Tencent to focus on core high revenue generating games moving forward, but there is still
risk of not having enough titles receive ISBNs to hedge the bet for success in the market. There is
also risk that the limited number of games that are approved could underperform.

Investment to extend the offering

Tencent’s strategy includes investments in gaming companies that augment its existing games and
pipeline, picking up on trends for growth areas globally. While the company has invested in or
acquired multiple game companies in Mainland China, the table below shows game companies
outside China only.

Tencent M&A outside Mainland China (Game Companies only)

Majority/Minority
Company Name Stake (%)
shareholder
10 Chambers Collective Majority undisclosed
Activision Blizzard Minority 5%
CJ Games (Netmarble) Minority 28%
Epic Games Minority 48%
Fatshark Minority 36%
Frontier Developments Minority 9%
Funcom Majority 100%
Glu Mobile Minority 21.50%
Grinding Gear Games Majority 80%
Kakao Games Minority 13.50%
Krafton (PUBG Corp.) Minority 13.21%
Leyou Technologies Pending 100%
Marvelous Minority 20%
Milky Tea Minority Undisclosed
Mini Clip Majority Undisclosed
Paradox Interactive Minority 5%

Asia Games Market Intelligence: NetEase Games Strategy

Pati Games Minority 20%

Platinum Games Minority Undisclosed
Pocket Gems Minority 38%
Riot Games Majority 100%

Roblox Minority / Partnership
1.3%
Robot Entertainment Minority Undisclosed
Sea (Garena) Minority 39.70%
Sharkmob Majority 100%
Square Enix Joint Venture / Partnership Undisclosed
Sumo Group Minority 10%
Supercell Majority 84.30%
Ubisoft Minority 5%
Voodoo Minority Undisclosed
Yager Development Minority Undisclosed

Tencent now owns a majority stake in Riot Games, Supercell, Mini Clip, Glu Mobile, Grinding Gear
Games, Funcom and Sharkmob, with plans to take Hong Kong listed Leyou games private soon. Its
acquisition of Riot Games helped solidify its position as the #1 PC games publisher globally due to
League of Legends, while Supercell solidified its position as the #1 mobile games publisher
globally.

Tencent is currently focused on investing in small to medium sized game developers that have the
potential to develop hits, either in areas where Tencent already excels, or in areas that Tencent
plans to enter in the future. Its investments in developers such as Platinum Games and 10
Chambers Collective may seem unusual when compared to the others, but this is because Tencent
is looking to enter the premium AAA games space itself. We expect M&A to continue playing a
large role for Tencent but note that the company faces increasing regulatory risk due to
geopolitical conflicts with the US and India.

Tencent’s stake in Epic Games is currently its most interesting investment. When Tencent first
invested in Epic in 2012 it was valued at $825 million, today the company is valued at
approximately $17.3 billion. Epic has grown beyond a game engine developer, now known best as

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Asia Games Market Intelligence: NetEase Games Strategy

the developer of Fortnite, with a publishing division, PC games store and online services toolset.
Many Tencent teams use Unreal Engine, allowing them to create more immersive and higher
quality games across multiple platforms. We believe that Unreal and Epic will be a key enabler for
Tencent’s global ambitions in the future.

Taking Tencent’s titles global

Tencent published more than 20 games in China during 2019 but only a handful of games
overseas. Portfolio studios such as Supercell and Riot Games boost its overseas game revenue,
with new titles such as Valorant, Legends of Runeterra and Hay Day Pop releasing in the past year.
The new strategy is to increase overseas output to become a global gaming company. Tencent is
taking this route for three reasons. Firstly, the growth rate of China’s game market is slowing.
Secondly, stricter regulations are leading to long approval times for games in China. Thirdly, the
games market outside China is worth over $100 billion.

Tencent is taking a multi-pronged approach to global expansion which includes:
- Investments and acquisitions in overseas game developers (Riot, Supercell, others)
- Publishing self-developed and licensed games overseas (HOK, Code: Dragon Blood)
- Licensing its self-developed games to key partners overseas (Sea Group Ltd)
- Licensing IP to develop new games for the global market (see next section)

While Arena of Valor (the name of HOK outside of mainland China) performed poorly overseas,
Code: Dragon Blood has performed steadily in Japan, giving Tencent a foothold in the country. Sea
unit Garena, leading games company in SEA, has right of first refusal to publish Tencent's mobile
and PC games in Indonesia, Chinese Taipei, Thailand, the Philippines, Malaysia, and Singapore. This
gives Tencent an experienced partner for launching games into Southeast Asia.

Licensing IP to develop games for the global market

As Tencent has built up its internal development capabilities, the company has become one of the
top mobile game developers in the world with hits across multiple genres. Its studios are able to
develop multiple games based on certain templates, but still have them play and feel distinct from
each other. With this in mind, Tencent has started to approach global IP holders to partner with
them, license the IP and then develop a new game based on said IP for the global market. This is
an attractive offer for IP holders that have a franchise that has succeeded on console or PC but
does not have a presence on mobile.

Tencent’s first major success with this initiative was its partnership with PUBG Corp, the
developers of PUBG, to develop a mobile version of the game that would be published globally by

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Asia Games Market Intelligence: NetEase Games Strategy

Tencent. Tencent utilized its experience from developing Crossfire Mobile, a shooter for
smartphones, and created a mobile version of PUBG which has grossed more than $1.5 billion
outside China. Tencent repeated this with Activision to develop a mobile version of Call of Duty,
which has grossed more than $500 million to date outside China.

As more IP holders are seeing how mobile games can be profitable, Tencent is in a good position
for more such deals. The company has already partnered with The Pokemon Company to create
Pokemon Unite, which is a new twist on a MOBA type game for mobile and Nintendo Switch. The
game uses HOK as a base but combines new innovative gameplay features with the Pokemon
universe to create a game that is distinct from MOBA titles already on the market. In the future,
we expect Tencent to scale in a way that will see them develop new cross platform titles based on
global IP.

Tencent plans to create games for PC and Console

Tencent has continually refined its mobile game development capabilities and now generates
around 75% of its online game revenue from mobile games. PC games did account for a larger
share in 2016, but the company moved away from releasing new self-developed PC games during
this time, opting to focus mostly on mobile game development which had a higher growth rate.
While Tencent has always had a presence in the PC game market, Tencent has never truly
explored console before due to the console ban prior to 2014. Even with consoles legalised after a
14 year ban in China, console game software market revenue hovers at 1% of total games market
revenue. Regardless, China’s PC and Console game market is still worth more than $15 billion and
the overseas PC and Console game market is worth over $40 billion.

Tencent is now looking to explore development of games for console and PC to grow its global
gaming revenues. These markets have different preferences and expectations than the mobile
games market and this is something Tencent will need to take into account if it is to succeed in this
space. Tencent founded NExT studios in early 2017 with the intention to experiment with new
creative ideas for games that can succeed on multiple platforms. The studio is developing
everything from card battle games for mobile, to co-op action adventure games for PS4, Switch
and PC, to more recently a new PvPvE shooter for high end PC’s called Synced: Off Planet. The
studio has around 400 employees working on all of its projects with the aim to become a globally
recognized studio.

Tencent has also been staffing up its TiMi studio in the US with plans to triple its headcount
through 2020. The studio is also exploring how best it can scale to offer games that run across
multiple platforms. Tencent’s Lightspeed & Quantum studio opened an LA office this year headed
by Rockstar veteran Steve Martin who had previously worked on titles such as Grand Theft Auto V

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Asia Games Market Intelligence: NetEase Games Strategy

and Red Dead Redemption 2. The studio, which has hired staff from Rockstar, Respawn, Insomniac
and beyond showcased its first console and PC game named Code SYN at UP. SYN is currently a
tech demo for an open world FPS game set in a cyberpunk world and running on Unreal Engine 4,
and hopes to be a AAA leader.

The shift to compete in the premium AAA space is part of a recent trend among Chinese such as
NetEase and MiHoYo as well as smaller Chinese studios. This move will come with its own
challenges due to the budget involved, scope of traditional AAA games and player expectations.
We believe that Tencent’s choice to create studios in the US led and staffed by veteran developers
is smart. However, Tencent seems to be treating its console and PC games as a completely
separate project from its mobile games. While this is a generally accepted approach in the games
industry today, we believe there would be more value to Tencent if they were to scale mobile
development expertise across multiple platforms to reach a broader audience with each game.
This is an approach which MiHoYo and NetEase are following.

Tencent is investing in Cloud and AI

Tencent announced a $70 billion planned investment into tech infrastructure over the next 5
years, exploring cloud computing, cybersecurity, artificial intelligence, 5G networks, big data and
more. This will benefit the games business as cloud computing emerges as a more prominent
component. Tencent has partnered with companies such as NVIDIA, Intel, Huawei and others to
provide a complete cloud gaming solution and currently offers solutions such as GameMatrix
(Mobile), Instant Play (Mobile) and START (PC/TV).

We believe that Tencent is uniquely positioned to succeed in the cloud gaming market by owning
key parts of the ecosystem including the cloud back end, cloud gaming platforms and a library of
IP. As 5G rolls out across the country, cloud gaming will help smartphone gamers access games
they never could before. The great unknown is the future performance of cloud games and their
business models.

Tencent is also pushing for the development of gaming AI for a number of practical reasons. An
advance in gaming AI not only helps players train in game, but also improves the game and
technology development as a whole. Tencent’s Wukong AI, which was first launched in August
2019, has been used as a training tool by gamers to create more realistic games. Tencent is looking
to broaden the gaming audience and drive deeper engagement with its investments into new
technology. We believe that the company has a competitive advantage in this space due to its
specialized labs dedicated to tech R&D.

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Asia Games Market Intelligence: NetEase Games Strategy

Tencent uses esports to grow its audience, engagement and gaming revenue

There are more than 350 million esports fans in China where Tencent has become the dominant
force due to its ownership of competitive gaming IP such as League of Legends, Honor of Kings and
PUBG Mobile / Peacekeeper Elite. Esports has become a new way for Tencent to grow its
audience, drive additional engagement and increase overall revenue through a combination of
online and offline events. The company runs esports competitions with tournament organisers
such as VSPN, which Tencent has a minority stake in. Tencent has cultivated an esports ecosystem
at an amateur, college and professional level, increasing the accessibility for both players and fans.

Tencent has also extended its esports ambitions to mobile, which is the fastest growing esports
segment and in the last year organised more than 1.7m PUBG Mobile esports competitions across
169 countries. The Peacekeeper Elite League season 3, scheduled to run in 2020, offers a prize
pool of $3 million, the highest for any seasonal league in China.

Esports is currently seen as a way to increase engagement and spend within games and the main
value being generated is the revenue from these games. As esports grows and is supported by
more stable infrastructure, we would expect it to become a more material and profitable venture
for Tencent.

Tencent has also invested heavily in the game live streaming market, with stakes in DouYu, Huya,
Bilibili and Kuaishou. The company is looking into merging DouYu with Huya which would mege
the two largest game live streaming sites in China into one mega site, giving Tencent further
control in this space.

Tencent faces regulatory risk both in China and globally

All corporate strategy has inherent strategic risk. For Tencent i of the larger ones is regulations and
geopolitics. In China the company faces a more stringent environment in terms of game approvals
and anti-addiction measures (please see Niko’s Regulations in China report for more information).
China’s gaming regulator has introduced stricter content and gameplay rules for ISBN licensing.
There is also an unspoken soft cap on the number of games that can be approved each year. The
regulatory process has impacted the timing of game launches for Tencent, with Call of Duty Mobile
being approved in China one year after its Western release while some games such as Fortnite or
Rainbow Six Siege still waiting. The risk to Tencent is the same as for other game companies in
China.

Geopolitically, Tencent has been impacted by mobile app bans in India that have targeted Chinese
developed games after rising tensions between China and India. PUBG Mobile and Arena of Valor

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Asia Games Market Intelligence: NetEase Games Strategy

have both been banned in the country and IAP ceased for existing users. This is notable as PUBG
Mobile was the #1 highest grossing game in the country at the time of the ban. We do not expect
this ban to be reversed for some time, if at all, and note that Tencent relocating servers to India
did not prevent the ban from taking place. There is still further risk to Tencent in India as the ban
has only impacted Chinese published games so far. Games published by Supercell and Riot Games
have not yet been impacted, nor has Call of Duty Mobile, which is published by Activision but
developed by Tencent. There is a risk these titles could be banned in the future.

Tencent is also under scrutiny in the US as geopolitical tensions rise. The Trump administration has
sought to ban WeChat and recently the Committee on Foreign Investment in the United States
(CFIUS) has begun to investigate game companies that have received an investment or been
acquired by Tencent in the past. Riot Games, Epic Games, Activision and others have been asked
to disclose user data storage policies and procedures to ensure there are no national security
issues. The CFIUS has the power to unwind previous deals and also block future investments. The
Trump administration proposed a new clean network initiative, which aims to remove
untrustworthy Chinese applications from app stores in the US.

Summary

Online games continue to remain Tencent’s largest business segment and are set to grow at a
faster rate in 2020 than in 2019. Tencent owes its success to its strong development, publishing
and operational capabilities, with the company now operating 17 game franchises that have
achieved more than 10 million daily active users. The company has been able to successfully
cultivate its owned IP, launching titles across PC and mobile while further extending the growth of
its IP via pan entertainment ventures. Tencent works with partners to create new games based
on licensed IP to help Tencent grow its global game revenues.

Tencent is well positioned to maintain its leadership position in China and is growing overseas.
However, there are risks to Tencent’s gaming business due to geopolitical tensions. Tencent also
faces an uphill challenge targeting the premium AAA game space due to its lack of experience
catering to this market. Overall, we believe Tencent has a strong strategy for 2020 and beyond and
its investments in games development, new technology, esports and other areas will help the
company continue to grow.

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