The current joke in the Chinese gaming industry says, “there are only three gaming companies in China: Tencent Games, NetEase Games, and ‘Others.’” The cruel reality is that together, Tencent and NetEase hold 70% of the country’s gaming market share, while the remaining 30% of the market is divided among hundreds of companies.
Among the ‘Others,’ Xiamen G-Bits Network Technology Co., Ltd. (better known as G-Bits) (603444.CN) stands out based on the enduring popularity of its games, which center on traditional Chinese culture, and on the strength of the company’s grades in our fundamental analysis. Based in Xiamen, G-Bits develops video games and multiplayer online games for a variety of platforms including the Web and mobile. The seventeen-year-old company has not only survived China’s harsh and ultra-competitive gaming market, but it has thrived thanks to its ability to keep its old games among players’ favorites and by regularly surprising the market with new hits.
G-Bits’ stock price has surged 116% since we upgraded it to a ‘Buy’ rating in 2017, and currently holds a grade of 79.3[1]. The company is currently a member of six MarketGrader China Indexes, including two tracked by VanEck ETFs: MarketGrader China All-Cap Growth Leaders (tracked by the VanEck Vectors China Growth Leaders ETF in the U.S. NYSE:GLCN) and the CSI MarketGrader China New Economy Index (tracked by the VanEck Vectors China New Economy ETF in Australia ASX:CNEW)
In 2020, China’s online games market was valued at $58 billion and is expected to reach $86 billion by 2027, according to a recent report by Research and Markets[2]. “China is one of the most gainful markets for the gaming industry globally. The online gaming market has appeared as the most influential and transforming segment in China. It has been witnessing a series of developments driven by increasing Internet and broadband infiltration, double-digit growth in online gaming users, rapid product development and commercialization. The rise of Chinese online gamers’ per capita income has reinforced the China online gaming market significantly,” said the report. A surge in demand for games during the COVID-19 pandemic, together with a large consumer base in the age range of 13-20 years, and good Internet connectivity across the country should continue to propel mobile to become China’s most important gaming platform, providing G-Bits a strong tailwind given its strength in the space.
In the first quarter of 2021, the company posted revenue growth of 51% to $171.94 million and net income growth of 13% to $56.5 million, both relative to the comparable period a year earlier. In the last five years revenue and net income have grown at an annualized rate of 56% and 43%, respectively, according to MarketGrader data. And through the most recent trailing 12 months, G-Bits has earned gross and operating margins of 86% and 45% respectively, among the highest in the industry.
Some of the company’s most successful games are based on traditional Chinese culture, such as its “Ask Tao” series, which is based on Chinese Taoist culture, as well as “Fight Fairy,” which combines ancient Chinese story telling with kung-fu elements popular with young players. “Ask Tao” is known as China’s evergreen computer game, and the mobile version, launched in 2016, is one of the three most successful massively-multiplayer online role-playing mobile games (MMORPG) in China. A MMORPG is a story-driven online game in which a player takes on the persona of a character in a fantasy world and interacts with a large number of other players. “Ask Tao” with 45 million accumulated registered users as of December 31, 2020, according to G-Bits’ 2020 annual report, generates about $30.8 million monthly revenue, accounting for more than 70% of the company’s sales.
Another important part of the company’s business is Shenzhen Leiting Information Technology Co., Ltd., a wholly owned subsidiary better known as Leiting Games. The game publishing and operating platform, which was founded in 2011, currently has more than 45 million Chinese players across both its mobile and PC games. Leiting game users are mostly young people and its key to success is its ability to launch differentiated games such as “The Strongest Snail” and rogue-like[3] mobile games such as “Unthinkable Maze,” which enjoy a high pay-to-play ratio (PTP ratio refers to the number of players who pay a fee to play or who spend on in-game items). Importantly, because China’s gaming giants don’t provide platforms for these small games, and independent developers are busy developing their own games, G-Bits has achieved a virtual monopoly in this field.
G-Bits’s third growth engine is another wholly owned subsidiary, Xiamen Geecap Equity Investment Co., Ltd. (Geecap), which invests in gaming startups. In addition to investing capital, Geecap becomes a partner in the growth of these startups, providing entrepreneurs with technical, managerial, and legal assistance, as well as follow-up financing after the initial investment. Geecap invests in both upstream- and downstream-related companies, and strategically helps extend the company’s reach into other industries where it can leverage its IP (such as recent investments in new fields like entertainment and animation). As of October 2018, Geecap was invested in more than 20 projects, with a cumulative investment of about $61.6 million.
G-Bits has won “Best Key Software Company in China Award” from China’s official game industry authority three years in a row, as well as 20 other national awards. Leiting Games has won the “Best National High-Tech Enterprises Award,” and the “2016 Annual Top Ten Cutting-Edge Games Business” award, along with nine others, also from the country’s official gaming industry authority. Such awards, in addition to games’ commercial success, are worn as badges of honor by Chinese companies, helping them gain users among impressionable young players.
While investors would be wise to continue owning the large gaming companies such as Tencent and NetEase (both of which we rate ‘Buy’ and are members of several MarketGrader Indexes), G-Bits offers investors a unique growth story with significant upside (its market cap is only $5.7 billion) at a reasonable valuation. These are the types of companies that tend to compound growth at higher-than-average rates for long periods of time, helping our Indexes outperform.
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[1] Overall grades and ratings are determined by looking at all 24 indicators in MarketGrader’s GARP + Quality analysis and aggregating them into a final numerical score that ranges between zero and 100. A score above 60 is assigned a ‘Buy’ rating.
[2] https://www.prnewswire.com/news-releases/china-online-gaming-market-report-2021-2027—esports-is-one-of-the-main-reasons-for-market-growth-as-competitions-are-broadcasted-online-301285933.html
[3] Roguelike (or rogue-like) is a subgenre of role-playing video games characterized by a dungeon crawl through procedurally-generated levels, turn-based gameplay, grid-based movement, and permanent death of the player character.
