China's gaming regulatory environment is improving, Citi says

JPMorgan picks stocks to benefit if virtual worlds take off in China

Parts of China have officially advanced the Metaverse development plan. The picture shows the Metaverse exhibition area of ​​the annual service trade expo held in Beijing on September 1, 2022.

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BEIJING — When it comes to futuristic concepts like the Metaverse, JPMorgan analysts believe they have found a strategy for picking Chinese stocks.

The metaverse is loosely defined as the next iteration of the internet, existing as a virtual world in which humans interact through 3D avatars. About a year ago, the hype surrounding the Metaverse swept the business industry. But in the U.S. at least, it hasn’t gained the momentum that companies like Facebook had hoped for.

The social networking giant even changed its name to Meta last year. However, its shares are down more than 50% this year — far less than the Nasdaq’s roughly 24% drop.

China faces the same consumer acceptance issues as the US. But JPMorgan analysts pointed out in a Sept. 7 report that the Asian nation’s metaverse development faces challenges from regulatory scrutiny. Cryptocurrencies, a staple of virtual worlds outside of China, are also banned at home.

Still, stock analysts say some Chinese internet companies could profit from specific industry trends driven by Metaverse’s development.


Their top picks in the industry are Tencent, NetEase and Bilibili. Among non-Internet companies in Asia, the likes of Agora, China Mobile and Sony emerged as potential beneficiaries of JPMorgan.

This is based on the company’s competitive advantage in specific aspects of the virtual world, such as gaming and social networking.

“The development of mobile internet and artificial intelligence over the past 5-10 years has shown that a company’s competitive advantage in one part of a technology ecosystem is often more important than which part of the ecosystem a company operates in in determining long-term value for shareholders” Analyst Daniel Chen and his team said in the report.

Analysts say there are two main ways companies can make money as the Metaverse grows.

Games and Intellectual Property

Under JPMorgan’s most optimistic scenario, China’s online gaming market nearly tripled from $44 billion to $131 billion.

Both Tencent and NetEase have strong gaming businesses and partnerships with global industry leaders, analysts said.

For example, Tencent has a stake in virtual world gaming company Roblox, while NetEase has partnered with Warner Bros. to develop a Harry Potter-themed mobile game, the report noted.

Business and Consumer Digitization

Analysts said “virtual worlds could take twice as long as digital,” compared to the current average of 6.6 hours. They also expect the company will be able to generate more revenue per internet user.

JPMorgan estimates that the total addressable market for business services and software in virtual worlds in China will reach $27 billion, while the digitization of offline consumption of goods and services will constitute a $4 trillion market in China.

For business services, NetEase already has a virtual conference room system called Yaotai, while Tencent operates a video conferencing app called Tencent Meeting, the report noted.

Tencent also “has extensive experience in managing China’s largest social network WeChat/Mobile QQ” and could benefit from virtual item sales within these platforms, analysts said.

Likewise, Bilibili’s “high user engagement will enable it to [value added service]/Virtual item sales in the long run,” the analyst said.

They noted that the app was the “preferred entertainment platform” for Chinese 35 and under, with each user spending an average of 95 minutes a day on the platform in the first quarter.

“The Obstacle to Overcome”

But the practicality of these efforts from a business perspective is unclear.

Instead of naming the companies as stock picks, JPMorgan analysts described a number of other Metaverse projects underway in China, such as Baidu’s virtual Xirang World and Baidu-backed iQiyi, NetEase and Bilibili’s. Virtual reality development.

Analysts say current virtual reality devices are too heavy to be used for extended periods of time, and cloud computing power and virtual world content are still limited.

“We think the ‘perfect form’ of the metaverse may take decades to achieve,” the analyst said. “Although we believe [total addressable market] Because the Metaverse is huge, we believe there are various technological hurdles to overcome. “

— Michael Bloom of CNBC contributed to this report.

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