Chinese gamers and the sector are no longer young–but are still exciting

Market expectations for China's gaming-sector growth have been low due to regulations and plateauing user growth beyond the 600m mark since COVID-19 lockdowns, in our view. But following a de-rating this year, we think companies' discounted valuations more than price in the secular growth headwinds versus historical averages and global peers. We think it is a good time to revisit China's gaming sector. This is the first part of our in-depth look at the domestic market—combining top-down and bottom-up analysis (see our interactive model), we arrive at three key conclusions: 1) we expect a robust domestic mobile gaming revenue CAGR in 2021E-25E of 15%, mainly driven by ARPU expansion; 2) we think China's gaming revenue could continue to consolidate among top titles, versus market concerns over fragmentation; and 3) we expect selective margin-expansion opportunities as top content producers (CPs) gain more pricing power in the industry value chain.