This year's investment opportunities in A-shares come from high-dividend and cyclical stocks. However, the valuations of these two types of assets have already reached historical highs, and there is significant uncertainty going forward.

At this time, sectors with lower valuations and improved earnings expectations are worth noting. The current game sector follows a similar logic, as the valuation of the game industry has reached historical lows, but with the release of several major games, the industry has reached a turning point.

So, which specific game companies should we pay attention to? Game stocks can be tracked from both short-term and long-term perspectives. In the short term, focus on companies with a rich pipeline of games and potential new products. In the long term, focus on whether a company's business changes align with future trends in gaming, such as Tencent Games and other major players, as well as game companies like Dianhun Network that have formed differentiated competitive advantages.

/ 01 / The Game Industry Reaches a Turning Point

The gaming sector is characterized by cyclicality, with fluctuations in performance driven by product release cycles and policy cycles.

Therefore, the ideal investment approach for gaming stocks is to track industry changes, buy at the bottom of the valuation cycle and before the industry reversal, and then reap the benefits of double gains in valuation and performance.

Based on this investment approach, where does the game industry currently stand?

Over the past five years, the valuations of A-share game index heavyweight stocks have mostly been above 20 times, but now the PE multiples of the top four weighted stocks in the game index are 11/12/13/14 times, which is already very close to the historical low valuations in 2018. The low historical valuations provide a high margin of safety for the industry.

Of course, margin of safety alone is not enough; it is also crucial to see if there are signs of improvement in the industry. Recently, the game industry has welcomed multiple favorable policies and industry trends.

On August 3, the State Council issued the "Opinions on Promoting High-Quality Development of Service Consumption." In the section on "Cultivating and Strengthening New Consumption - Digital Consumption," the Opinions mention supporting the development of e-sports, social e-commerce, live streaming e-commerce, etc.

In the section on "Stimulating the Vitality of Improved Consumption - Cultural and Entertainment Consumption," it directly mentions improving the quality of online literature, online performances, online games, radio and television, and online audio-visual content. This is the first time that game-related expressions have been written into a national-level document.

After the favorable policies were announced, the game sector began to rebound. Since August 3, the game ETF has risen by nearly 4%, and Dianhun Network, with a dual concept of gaming and e-sports, has risen by nearly 5%.

Meanwhile, the game industry has also stabilized. According to data from the Game Work Committee, domestic game market revenue exceeded 147.2 billion yuan in the first half of the year, an increase of 2.08% year-on-year. Although the growth rate may seem low, it is actually underestimated.

This year, the game product cycle is relatively delayed, and most of the major new games were only launched from mid-year onwards, contributing little to first-half performance.

For example, Tencent's "Dungeon & Fighter: Origin" was only launched on May 21, which is already considered an early release among major games. MiHoYo's "Zone of the Enders: The 2nd Runner - M∀RS," NetEase's "Naraka: Bladepoint," "Seven Days," and Bilibili's "Project: Phoenix" were all launched in July.

These major new games have also performed well after their launch. SensorTower predicts that the domestic first-month revenue of the mobile version of Dungeon & Fighter is expected to be around 5 billion yuan, on par with the hit game "Honor of Kings." The revenue of "Naraka: Bladepoint," launched in July, is also expected to be around 1 billion yuan, exceeding expectations.

The concentrated release of major new games and their better-than-expected revenue performance indicate that the industry is expected to achieve faster growth in the second half of the year.

After stabilizing, structural changes have also emerged in the game industry. In the first quarter, revenue in the A-share game sector increased by 10.8% year-on-year, higher than the industry's growth rate of 7.6% over the same period. This is mainly due to the difficulties faced by small game companies in recent years, resulting in the consolidation of game assets into the hands of medium and large game companies, further enhancing industry concentration.

With low valuations and an industry reversal, many brokerages have also pointed out that the game sector has now entered a favorable timing for left-side layout. For example, Shenyin Wanguo Securities mentioned in a research report, "Game odds are prominent, and attention should be paid to rebound opportunities at the bottom."

With expectations of an industry rebound, which game companies are worth paying attention to?

/ 02 / Which Game Companies Are Worth Paying Attention To?

After the "trough-to-recovery" β trend in the game industry, some game stocks also present α opportunities.

For game stocks, α opportunities in the short term mainly depend on changes in the quality of the games in their portfolio, while in the long term, they depend on whether the company's business changes align with future trends in gaming.

Regarding short-term opportunities, XD.com is a good example of a company that has increased its value through improved game quality. Relying on the better-than-expected performance of "Muffin Knight," XD.com's share price has doubled this year. Which other companies on the market may replicate XD.com's success?

Attention can be paid to players with a rich pipeline of games and potential new titles in their hands, such as Dianhun Network and NetEase.

This year, Dianhun Network's self-developed games "Barbarians vs Zombies 2" and "Cultivation Era" are seen as new growth points for the company. "Barbarians vs Zombies 2" has completed preliminary testing and is planned to be released on multiple platforms such as mobile, PC, and console, with an expected release date soon. "Cultivation Era," an open-world game with a cultivation theme, has obtained a distribution license and is planned to be released after the New Year, potentially becoming a new performance driver for the company.

After launching major titles such as "Chronicles of Elyria" and "Naraka: Bladepoint" in July, NetEase will continue to release highly anticipated games such as "Project Awakening" and "Marvel's Midnight Suns" in the second half of the year.

From a longer-term perspective, whether a company's business aligns with industry trends determines its long-term value. For example, Tencent seized the opportunity presented by the rise of mobile gaming and achieved a leading market share.

Today, the combination of gaming and AI is a clear trend in the industry's development, but it is still in its early stages, and the differentiation between game companies in terms of AI integration is not yet apparent. At this point, it is most suitable to bet on leading players like Tencent Games who are most likely to break through in AI gaming.

Compared to AI+gaming, the value enhancement brought by e-sports to gaming has not yet been fully recognized by most people.

A few days ago, e-sports received unanimous approval to become an Olympic sport, and the first Olympic e-sports games will be held in Saudi Arabia in 2025. Considering that the Olympics is a global event that attracts the attention of users worldwide, the inclusion of e-sports in the Olympics will greatly increase its influence and have a stronger driving effect on e-sports games.

Companies like Dianhun Network, which have a deep integration of e-sports and gaming, will benefit the most. Dianhun Network's self-developed e-sports game "Dream Three Kingdoms 2" was selected as an e-sports event for the Hangzhou Asian Games, and the company also participated in the formation of the national training team for the "Dream Three Kingdoms 2" project. This has given it experience in organizing and operating e-sports events. With these experiences and advantages, Dianhun Network is expected to organize and participate in more e-sports events, thereby leveraging the influence of e-sports events to enhance user engagement and revenue in its gaming business.

Returning to the game industry as a whole, low valuations provide a high margin of safety, while the release of major new products provides growth expectations for the industry. The reversal of game stocks is on its way.