CMSC: The overall performance of the game industry chain exceeds market expectations. It is expected that there is still room for upside in future valuations.

CMSC's research report stated that overall, the performance of the gaming industry chain exceeded market expectations. With the addition of this year's summer season as the industry's peak season, it is expected that companies such as Huatong, Tencent, G-bits Network Technology, Kaiying, Giant, Xindong, Shunwang, Shengtian, and others will continue to maintain good performance in the third quarter. With the current high prosperity, the average valuation of the gaming industry is around 20 times, and compared to the historical high level of over 30 times, it is expected that there is still room for growth in the future. CMSC strongly believes in Beijing Ultrapower Software, Southern Publishing and Media, Focus Media Information Technology, Perfect World, Kingnet Network, Giant Network Group, Tencent, Kunlun Tech, China Science Publishing & Media, Mango Excellent Media, Bilibili, and COL Group Co., Ltd. CMSC's main points are as follows: 1. With policy support, the gaming industry's interim report showed high growth, and the performance in the third quarter is expected to continue to increase compared to the previous period. With this year's background of policy support, the rapid increase in the number of game approvals, as well as the overseas expansion of SLG games represented by Huatong and Element Fun, the growth rate of the gaming industry has significantly increased from single-digit levels to double-digit levels. The interim report released shows that the leading gaming company Tencent's domestic and international game revenue in the first half of the year was 119.7 billion yuan, hitting a new high in history, maintaining a growth rate of 24% despite a large base, reflecting the high prosperity of the industry. At the same time, XD INC's interim report shows a 235.3% increase in net profit. A-share gaming leaders like Huatong, G-bits Network Technology, Shunwang, and Shenzhen Bingchuan Network also successively released interim reports and performance forecasts: Huatong's non-net profit attributable to mother increased by 124.43%, G-bits Network Technology's growth rate exceeded 40% after deducting non-profit, Shunwang's growth rate was close to 70%, and Shenzhen Bingchuan Network's profit range was between 3.1 billion yuan and 4 billion yuan. Overall, the performance of the gaming industry chain exceeded market expectations. With this year's summer season as the industry's peak season, it is expected that companies such as Huatong, Tencent, G-bits Network Technology, Kaiying, Giant, Xindong, Shunwang, and Shengtian will continue to maintain good performance in the third quarter. With the current high prosperity, the average valuation of the gaming industry is around 20 times, and compared to the historical high level of over 30 times, it is expected that there is still room for growth in the future. 2. Emerging consumer and AI applications are expected to drive the gaming sector to achieve breakthrough development. The above-mentioned performance growth belongs to the "alpha" level, and in the future, with the popularization of emerging consumer and AI applications, the gaming industry is expected to usher in a new "beta" drive. Games themselves are in the emerging consumer sector, with IP attributes, clear business models, and abundant cash flow. On a global scale, companies like Nintendo, ROBLOX, Take-Two, EA, and SEA have all hit historic highs in stock prices, with valuations generally close to 40 times. The core reason for maintaining high valuations lies in the fact that the gaming industry is relatively unaffected by macroeconomic and trade friction, and its characteristics of small and high-frequency consumption are favored by Generation Z and middle-aged groups, with strong social attributes and user stickiness, making it the core force of emerging consumption. At the same time, with the continuous improvement of overseas and domestic computing power, the explosion of AI applications is gradually approaching. Whether it's AI Coding, AI Videos, or AI Companionship, they all show that the gaming industry is expected to be the main beneficiary. Looking back at history, with every technological revolution, the gaming industry has always been the ultimate beneficiary. Chip leader NVIDIA has relied on gaming graphics cards to sustain development during the toughest times, and internet giants Tencent and NetEase have ultimately grown into giants through their gaming businesses. Given that gaming companies have abundant cash flow, the future merger and acquisition opportunities in the AI field are also worth paying attention to.