September 2018 Chief Investment Office GWM Investment Research. Ahead of the game. Shifting Asia

Transcription

1 September 2018 Chief Investment Office GWM Investment Research Ahead of the game Shifting Asia

2 Content 03 Editorial 04 Asia video gaming by the numbers 06 Executive summary 07 Asia s gaming leadership to expand 11 The heterogeneous nature of Asia gaming 14 Gaming stakeholders The four major pillars 15 esports: A paradigm shift for Asia s gaming industry 18 The life of a professional gamer ( ) 24 Augmented reality and virtual reality 26 How Asian gaming is at the cusp of major technological changes 30 What does gaming mean for Asian society 32 How investors can participate in Asia s gaming industry Shifting Asia This report has been prepared by UBS AG. Please see important disclaimer and disclosures at the end of the document. Editor-in-Chief Carl Berrisford Author Sundeep Gantori Editor Aaron Kreuscher Design CIO Content Design Illustrations Rodrigo Jimenez Project Management Sita Chavali Cover photo gettyimages Contact ubs.com/cio Subscribe For more updates from the Chief Investment Office, please sign-up at

3 Editorial Min Lan Tan Head of APAC Investment Office Dear reader, A rapidly growing online population and rising incomes have turned Asia into a breeding ground for new technologies. We have explored several areas in past Shifting Asia publications of booming homegrown innovation in the region, including artificial intelligence, insurance technology, cashless payments and biotechnology. The video game industry (referred to as the gaming industry ), the focus of this edition, is another such area where Asia has not only taken over the reins from the developed world but looks set to reshape the industry s future. The video games of today are very different from those we grew up with. Most of us would remember the days of Pong and Atari, when 8-bit graphics had us glued to our television screens. Now, people have left the living room and are gaming on the go with their mobile phones or through virtual reality headsets. Yet it s not just games and platforms that have changed; top developers and games markets are now increasingly residing in developing Asia. The games market is now a hundred- billiondollar revenue industry, and its growth trajectory continues to point sharply upwards especially in Asia, which has been growing by double digits over the past few years. In fact, despite a late start, Asia will become the biggest market for games revenue worldwide this year, with its growth outstripping even the explosive pace experienced in the West over the recent decades. Looking ahead, we expect Asia s video games revenues to grow from USD 61.1bn in 2017 to USD 200bn in 2030, an average annual growth rate of 9.5%, with a third of the gains driven by user growth and the rest by increased monetization per user. Specifically, we think the industry will benefit from a) a rising share of games expenditures in overall entertainment spending, b) a rise in gamers from new markets like Southeast Asia and South Asia, increased penetration of female and older gamers and new platforms, c) increased monetization per user, and d) expanding gaming ecosystems thanks to adoption of new technologies like artificial intelligence. Another exciting development is the growing popularity of esports, the professional competition of video games, and its influence on entertainment spending habits. Asia is currently home to around half of the world s 395m esports fans, 60m of whom tuned in to watch the League of Legends World Championship in With Asia s esports sector gaining official recognition from events like the Asian Games, it s likely to continue growing quickly in the years to come, leading to greater monetization opportunities for the games industry. The future of Asia s video game landscape is exciting but not without risks and challenges. China s recent regulatory delays in new game approvals show how governments are seeking to strike the right balance between the need to regulate and a conducive environment for new entertainment forms to thrive. Still, we expect Asia s games revenues to rise three folds between 2017 and 2030 an estimate which could prove conservative and we believe investment opportunities abound in the years to come. We hope you enjoy reading about this fun and exciting topic, and please reach out with any questions or feedback. Game on! Shifting Asia: Ahead of the game September

4 Asia video gaming by the numbers APAC #1 Asia Pacific s ranking by region in the global gaming market, with the region significantly outgrowing the global market (mid-teen growth rate vs. high single digits). Asia s gaming industry is set to record a notable achievement this year: revenues are on pace to top the rest of the world for the first time, according to Newzoo. The strong growth in recent years has been driven by mobile gaming, with support from incremental growth drivers like esports, VR/AR and the emergence of new technologies. It s clear that Asia s ascent has only begun. > China billion active gamers The number of active gamers (those who play games at least once a month or spends at least one hour on average per week playing games) in Asia Pacific, according to Newzoo and Razer. If the region s gamers were a country, they would represent the third most populous nation in the world. China accounts for almost half of the 1.2bn. USD2.5million The amount Asia s best esports player is paid in USD millions annually to compete in professional gaming leagues, according to Bloomberg. The figure doesn t include endorsements or prize money and shows the rising popularity of esports, which may soon rival many traditional sports % APAC s gaming share of media & entertainment spend Asia Pacific s gaming share in percentage of regional media & entertainment spend. While the region s entertainment spend as a percentage of GDP is below the global average, its spend on gaming as a share of total entertainment spend is above the global average (12.3%) at 13.8% (source: Frost & Sullivan, Razer, Bloomberg Intelligence). This highlights the strong gaming culture in the region. 4 Shifting Asia: Ahead of the game September 2018

5 Asia video gaming by the numbers 25% APAC s share in the global gaming peripherals market Asia Pacific s share in percentage in the global gaming peripherals market, according to Newzoo and Razer. Despite accounting for more than 50% of global active gamers and global gaming revenues, the region s spend on gaming peripherals significantly lags behind North America and Europe. While the higher share of mobile gaming partly explains the lower peripheral spending, we still see peripherals as an incremental growth opportunity within the region. 45% Active female mobile gamers in China The percentage of active mobile players in China who are female. In comparison, 41% of US mobile gamers are female, and the ratio is lower in the rest of the world. While Asian female gamers dominate genres like casual and simulation games, their participation is increasingly rising in other genres. 60min Average time spent by active gamers in China The average time spent in minutes by active gamers in China per day, based on a UBS Evidence Lab survey. With the rising trend of esports, the user engagement with gaming titles should continue to gradually rise in the region. 9.5% Average annual growth rate USD USD 61 billion billion 200 Our forecast for Asia s gaming revenues, which we expect to grow more than three times from We conservatively expect the region s revenues to grow from USD 61.1bn in 2017 (source: Newzoo) to USD 200bn in 2030, or an average annual growth rate of 9.5%. The estimate is also based on the assumption that gaming should constitute a high-teen percentage of the region s entertainment spend, which we think is reasonable given the increasing shift from traditional media spend to gaming. Shifting Asia: Ahead of the game September

6 Executive summary USD 61.1bn 2017 USD 200bn 2030 Asia s gaming ascent is set to continue over the next decade, with gaming revenues growing from USD 61.1bn in 2017 to USD 200bn in Video game revenues in Asia Pacific will exceed the rest of the world s this year, cementing the region s position as a global gaming leader. And this journey has only just begun Asia s gaming ascent is set to continue over the next decade, with gaming revenues growing from USD 61.1bn in 2017 to USD 200bn in 2030 (one-third driven by user growth, two-thirds by increased monetization per user), according to our forecasts. While the recent regulatory suspension of new game approvals in China is a temporary setback, we don t believe it will affect the region s strong gaming culture and long-term growth opportunities; we continue to forecast average annual revenues growth of 9.5% for Asia s gaming industry from 2017 to This is based on multiple factors, including steady growth in Asia s gaming population thanks to new audiences, markets and platforms, the rise of gaming as a share of the region s entertainment spending, new supporting technologies and the rising popularity of competitive esports. Global esports audience 395m APAC 51% Asia Pacific today accounts for 51% of the 395m global esports audience, according to Newzoo. esports adoption, which drives gaming discovery and distribution in growing ecosystems, is strong in Asia thanks to favorable demographics (high proportion of millennials). We expect esports to be a key future driver of Asia s gaming industry in the years ahead. We expect esports to be a key future driver of Asia s gaming industry in the years ahead. New technologies, like artificial intelligence, cloud gaming, and facial and voice recognition, should enhance Asia s gaming experience and drive increased user engagement and monetization. Augmented and virtual reality are potential long-term drivers, but their development is still in the infancy phase and therefore needs to be refined. The addictive nature and violence of some games call for regulation of Asia s gaming industry. We believe the regulation of gaming will continue to evolve and a few markets like South Korea lead by example. However, the importance of gaming to society both in terms of its entertainment and commercial value cannot be ignored. For example, the gaming industry has created, and will continue to create, a significant number of creative jobs in the region. The rising trend of gamification, the process of using gaming elements to engage and motivate participants in non-game contexts like healthcare or employee-based activities, is another area that can aid society by improving the productivity of workforces. Sundeep Gantori CFA, CAIA With Asia leading the global gaming industry s revenues, most major global gaming companies worldwide are leveraged to the region s strong growth prospects. In particular, Chinese internet gaming companies and US-based software and semiconductor companies stand to benefit due to their superior margins, whereas we see limited opportunities in gaming hardware companies due to their lower margins. In addition to publicly listed companies, interesting growth opportunities are available in the venture capital and private equity space. 6 Shifting Asia: Ahead of the game September 2018

7 Asia s gaming leadership to expand istock The recently held Asian Games, which takes place every four years and is the second-largest multi-sport event behind the Olympics, in Indonesia marked a unique milestone in the history of competitive sports: esports debut in an internationally recognized sporting event. The competition included popular titles like League of Legends and Clash Royale. At the next Asian Games, to be held in 2022 in Hangzhou, China, esports will be an official medal sport. It s no coincidence that Asia is the first to recognize esports as an official sport. The gaming culture and industry in Asia has grown by leaps and bounds over the past few years. For the first time in history, Asia Pacific s gaming revenues will exceed that of the rest of the world s this year, cementing the region s position as a global gaming leader. And we believe the journey has only just begun Asia s gaming ascent is set to continue over the next decade, with Fig. 1 UBS estimates Asia Pacific s gaming revenues to reach USD 200bn by Source: Newzoo and Bloomberg Intelligence (2017), UBS Estimates (2030 estimates), as of August 2018 Shifting Asia: Ahead of the game September

8 Asia s gaming leadership to expand Fig. 2 Global console installed base Current generation Previous generation Nintendo Switch 11.5% 9.5% Nintendo Wii U Microso Xbox % Microso Xbox One 25.4% Sony PlayStation 4 37% Nintendo Wii U % % Source: VGChartz, Bloomberg Intelligence, UBS Sony PlayStation 3 gaming revenues growing from USD 61.1bn in to USD 200bn in 2030, according to our forecasts, a more than threefold jump. This forecast is based on our expectation for greater user growth (accounts for one-third of the projected rise in revenues) and increased monetization per user (accounts for the the rest). In fact, we believe our estimated annual average gaming revenues growth of 9.5% during this period is conservative given the following growth drivers: 1. Rise in the share of entertainment spending: While Asians spend relatively less on entertainment & media (1.8% of their income vs. 2% globally 2 ), they spend much more on video games. Unlike the West, where offline, console gaming is quite popular, Asia s gamers are largely online via PCs and increasingly mobile devices; the latter currently accounts for around 60% of the region s gaming revenues 3. Also, compared to the West, Asia Pacific s younger demographics the key proponent of gaming should benefit the region. According to Newzoo, Razer and Bloomberg Intelligence, 71.2% of millennials (aged 12 to 35) and 54.7% of non-millennials (aged 36 to 65) play video games. The relatively higher share of mille nnials in the region, who are reshaping consumption in Asia, should therefore drive increased spending on gaming in the years and decades to come. We re also positive on the region s gaming growth prospects because of its unique and strong gaming culture, which has been molded by economic traits and gaming preferences. Given most games are not played on consoles but online through PCs and mobile devices, the most popular games in the region have a social element where gamers compete with their friends and colleagues. In addition, Asians prefer a deep level of customization, in which players pay for virtual skins or avatars to personalize their in-game characters. Also, due to a lack of quality entertainment options and gaming s social nature, gaming has penetrated well beyond cities in the region. Hence, we believe gaming penetra- 1 Source: Newzoo 2 Source: UBS CIO estimates 3 Source: Newzoo 8 Shifting Asia: Ahead of the game September 2018

9 Asia s gaming leadership to expand tion should continue to rise out of overall entertainment spending, we expect gaming expenditures to reach 19 20% by 2020 (versus 13.8% today). This forecast is also conservative, as the incomes of gaming-loving Asian millennials and teenagers should increase alongside the industry s growth in the region. 2. Rise in gamers and monetization: According to Newzoo, Razer and Bloomberg Intelligence, Asia Pacific accounts for almost half of the world s gamers. There are 1.2bn in the region, with China accounting for almost half, and this number is rising by 6 8% every year. While we expect the pace of user growth to slow down eventually, we still see opportunities emerging from new audiences, markets and platforms. a. New audiences: While young and male gamers dominate Asia s gaming population, an interesting development has been the growing trend of new female gamers and older ones above the age of 40. For example, according to Newzoo, 45% of Chinese mobile gamers are female. With still-solid demand for casual, arcade and sports games, we think more women and new audiences will enter the market, thus swelling overall gamer numbers in the region. b. New markets: While China currently dominates Asia s gaming population, we see incremental growth from new markets in Southeast (ASEAN) and South Asia, where gaming penetration still has room to grow. A case in point is the growing popularity of esports in ASEAN, which is helping to attract new gamers. c. New platforms: While PC gaming growth is saturated, we see steady growth continuing for mobile gaming. Also, the emergence of new platforms like augmented reality and virtual reality should create new categories within gaming. Interestingly, traditional gaming consoles, along with hybrid consoles, are also witnessing strong growth in the region. Fig. 3 Global esports audience by region Rest of the world Europe 18% North America 18% % 51% The biggest opportunity will come from increased monetization per user, in our view. Today, gaming revenues in Asia Pacific are close to USD 50 per gamer, versus USD 100 per gamer in the US, highlighting significant monetization upside in the future. While we do not expect the gap to narrow overnight, we believe increased engagement should result in higher monetization over time. 3. esports to extend discovery and distribution: The rising trend of esports in Asia makes us particularly excited about the industry s growth prospects. Today, Asia Pacific accounts for 51% of the 395m esports fans worldwide. With increased game discovery for users and distribution options for publishers, esports should drive increased monetization for Asia s gaming industry. Today, most of the monetization in Asia s esports industry is through ticketing and sponsorship, but looking ahead, we believe media rights, advertising and merchandise should fuel monetization. The rising trend of mobile esports will likely be a key driver, as Asia has very strong exposure to both mobile games and mobile viewing given its strikingly high mobile penetration rate. Today, PCs are the primary platform for esports, with PC-based titles the most popular ones in terms of prize money. But as mobile esports take off, Asia should emerge as a leader in monetization. APAC Source: Newzoo, Bloomberg Intelligence, UBS, as of July 2018 Shifting Asia: Ahead of the game September

10 Asia s gaming leadership to expand 4. New technologies to boost Asia s gaming ecosystem: The emergence of many new technologies, like artificial intelligence, cloud gaming, facial and voice recognition, mobile payments and blockchain, should provide increased opportunities for user engagement, thus strengthening Asia s ecosystem in the coming years. This in turn should result in new and improved monetization opportunities for Asia s gaming industry, helping address its currently untapped huge potential. The strong recent growth of Asia s gaming industry is a telling sign of its bright future, with revenues set to more than triple over the next 13 years. To put things into perspective, our USD 200bn revenues estimate in 2030 is equivalent to the region s entire smartphone industry revenues in 2016, highlighting the growing relevance of Asian gaming in the future. Such robust growth opportunities provide interesting investment opportunities for investors in both the listed and unlisted space, in our view. What exactly is esports? Lee Faker Sang Hyeok from South Korea signed with SK Telecom, a South Korean wireless telecommunications operator, to play League of Legends competitively for USD 2.5m a year, the highest esports contract known, according to media reports. Lee joins SK Telecom s esports pro team, which has taken home USD 8.5m in total prize money from 211 tournaments. So what exactly is esports, and why are the top players getting paid so much? esports is simply professional gaming, in which gamers compete in tournaments for prize money (similar to tennis Grand Slams). The most common esports games are Dota 2, Counter-Strike and League of Legends. The professional gamers form part of a team or play solo, depending on the game format. The matches are usually live streamed via platforms like Twitch or held in arenas in front of their many fans. The winning team of The International 2018 Dota 2 tournament took home USD 25.5m, the largest purse in the history of esports. So, if you consider yourself a top-notch gamer, it might be time to consider a career change. 10 Shifting Asia: Ahead of the game September 2018

11 The heterogeneous nature of Asia gaming Asia s gaming leadership to expand Asia Pacific s gaming culture is among the strongest globally, driven by the popularity of online and social games as well as a robust gaming ecosystem. This is reflected by the region s high gaming penetration (gaming revenues/gdp), which is close to 0.25%, versus the global average of 0.16% and many other developed markets like the US ( 0.15%), UK (0.11%) and Switzerland (0.6%). But tastes and penetration rates vary greatly throughout the region. To better understand the nuances of Asia s gaming landscape, we have divided the region into three zones by penetration rate: strong penetration (>0.25%), moderate penetration ( %) and low penetration (<0.1%). Asia has a high gaming penetration rate compared to the rest of the world Gaming revenues as a % of GDP Russia Canada USA Germany France Switzerland Spain Italy China India Myanmar Japan Korea Taiwan Hong Kong Vietnam Brunei Indonesia Brazil Thailand Singapore Malaysia Australia Strong > 0.25% Moderate % Low < 0.10% Source: Newzoo, World Bank, Bloomberg, IMF, UBS Strong-penetration markets China, Korea and Japan fall under the strong penetration category. While China is the biggest market by revenues globally Newzoo forecasts USD 37.9bn of gaming revenues in 2018 Japan has the highest penetration followed by Korea and then China. While the global dominance of Japanese console makers like Sony and Nintendo highlights the deep roots of Japan s gaming culture, Korea has benefitted from solid IT infrastructure, a strong developer community and favorable regulation. China is a unique success story despite being a newcomer, vibrant and large online communities and the success of mobile gaming have catapulted the country to become a global leader. Moderate-penetration markets Most Southeast Asian markets, Taiwan and Hong Kong fall under the moderate penetration category, in which gaming spend as a percentage of GDP is between 0.10% and 0.25%. The biggest markets of this group by revenues are Taiwan, Indonesia and Thailand, according to Newzoo. The region s gaming community is around 250m strong, and is steadily growing thanks to rising broadband penetration and incremental additions of mobile gamers. While the region is unlikely to surpass Korea or China s penetrate rate in the near term, strong growth should continue driven by a lower base and the increasing popularity of social games and esports. Low-penetration markets Gaming penetration is less than 0.1% of GDP in South Asia, including India and Australia. The low penetration is mainly explained by the lack of a strong gaming culture, coupled with alternative entertainment options like sports and movies. That being said, rising gaming demand from millennials may lead a gradual shift in markets like India and Bangladesh. Shifting Asia: Ahead of the game September

12 Interview This interview contains views which originate from units outside CIO Global Wealth Management. Interview Stella Lui Stella Lui Director of Investor Relations Tencent Stella Lui is currently Director of Investor Relations at Tencent, the largest company by gaming revenues globally. Stella has more than 12 years of experience in investor relations and corporate communications. Prior to joining Tencent, Stella spent over seven years as Investor Relations Officer at Henderson Land, a major property developer in Hong Kong. She also worked at international public relations agencies as a financial communications consultant for a number of financial institutions and listed companies in Hong Kong. Stella holds a Bachelor s degree in Finance (Honours) from the Hong Kong University of Science and Technology, as well as a Master s degree in Economics and International Business from the University of East Anglia, UK. China s gaming industry has witnessed sharp revenue growth during the past decade. In your view, what will be the key future growth driver for the industry? Yes, China gaming has seen significant growth during the past few years, especially driven by the rapid development of smartphone games, and we believe there are still a lot of growth levers for the next decade. With the migration of users from PC to smartphone games, we expect smartphone games to continue having more vibrant development and stronger growth than PC games in the short and medium term. On the other hand, we are also positive about the long-term development of PC games as the technology advances. We see room for gaming users to continue growing in China, as user penetration rates as a percentage of the overall online community in China can rise further, which means there are still opportunities for both PC and smartphone user growth. In particular, given the success of smartphone game titles like Honor of Kings and mini games on Weixin (WeChat), we believe user growth will continue. For example, a lot of Chinese women have recently joined the gaming bandwagon thanks to female-targeted games like QQ Dance (50% of users are female). Leveraging the massive user base on our social platforms, users can enjoy playing games while continuing to interact and invite their friends on the social platforms to join them. Another growth driver is the monetization of smartphone games. Currently, our monetization per daily active user (DAU) has room to grow to match the levels already enjoyed by our industry peers. For example, our mobile game like Honor of Kings, which is only two years old, has room to increase paying ratios and average revenue per user (ARPU) as it s still attractively priced compared to a PC game like League of Legends. To sum up, we believe a combination of both paying user growth and higher ARPU should drive growth in the future. Also, we are excited about the emergence of esports and live broadcast gaming services, which currently serve as important marketing means for us to promote our games and deepen our engagement with gamers. Talking about esports, how do you see their evolution? esports are one of the main ways to promote our gaming business. We have published many PC and smartphone games, and esports can actually increase user engagement. PC games have a longer history than smartphone games, which is the reason we have been running esports on PCs for some time. Because of the rapid development of smartphone games and their bigger user base, we have been very active in promoting smartphone games through esports. We have licensed some broadcasting companies to show esports matches, as many of our gaming customers are interested to watch our best gamers play in real time. The rising popularity of esports is also evident by its increased acceptance in society. Over the last few years, we have seen courses on esports being offered by universities. And in the not- so-distant future, we should see 12 Shifting Asia: Ahead of the game September 2018

13 This interview contains views which originate from units outside CIO Global Wealth Management. Interview esports recognized as official games in the national gamers or even Asian Games. esports are at the early stages of monetization and are increasingly being used as part of promotional campaigns to bring stakeholders together. What technologies can be used to enhance the overall gaming experience of your customers? We are pretty excited about the use cases of artificial intelligence (AI) for the firm and for gaming in particular. For example, we have been applying AI in gaming applications to pair players up with one another. We use machine intelligence to find the right preferences and match gamers up based on skills. Similarly, we leverage big data technologies and facial recognition technology across both our PC and smartphone gaming divisions. On virtual reality, the opportunities are mostly in PC games but the ecosystem is not mature enough at the moment. A few users in China complain how the headsets are too heavy to use while playing. Also, the games need to be appealing to the players. So we believe it is a work in progress. Hopefully, lighter headsets with improvements in the overall VR ecosystem will increase the adoption of VR in gaming in the future. Finally, what do you believe are the key success factors that have made Tencent a gaming leader not just in China but globally? First and foremost, we have unique, powerful and popular social platforms, WeChat and QQ, which allow us to distribute and easily promote our games. For example, on these platforms, users can see how many of their friends are playing which games. They can send an invitation to their friends and expand the engagement. This unparalleled reach gives us the choice of publisher in China. In addition to the above platforms, we also benefit from our own Android-based app store in China, the largest in China this also helps us to extend our gaming leadership. Second, we have strong local know-how as we know our user preferences; for example, the types of genres they like or the amount of time they spend on various types of games. We regularly monitor the feedback of our gamers and fine-tune the games from time to time, which is important. Third, coupled with our local-know and our strong development capabilities, we have multiple teams with different strengths and expertise in certain genres, as well as strategic partners in China. And internationally, we are able to identify and develop high-quality new games. There are three factors, among others, that give us a unique position in China s gaming industry. Shifting Asia: Ahead of the game September

14 Gaming stakeholders The four major pillars The gaming ecosystem has many participants, but we have broadly divided them into four major categories. Developers Developers, who are the most important stakeholders in the gaming industry, use their creativity and imagination to develop games through various steps like animation, storytelling design, programing, etc. Increasingly, major gaming platform companies have become vertically integrated to take advantage of synergies between development and publishing. Popular developers include Epic Games, Bluehole and Bungie. Customers While all industries have a stakeholder category called customers, unique to the gaming industry is that there are two sub groups of customers: players who actively play the games and those who watch others play the games (such as the case with esports). Developers Customers Storytelling design Game development Players Game watcher Publishers Enablers Marketing Financing studios Peripheral makers Distribution Publishers Publishers are akin to movie production houses that engage in various activities, including financing studios, game development, engaging distributors for publishing, making games digitally available, and managing sales and marketing. With the rising popularity of esports, the role of publishers is evolving to take on additional tasks like creating leagues, merchandising and operating tournaments. Most publishers hold the content and intellectual property (IP) rights of the games. Popular publishers include Tencent, NetEase, Activision Blizzard and Electronic Arts. Enablers This group mainly includes participants who support the development of the gaming ecosystem. They mainly include: a) hardware and gaming system providers like makers of gaming consoles, peripherals (keyboards, mice, headsets including VR/AR devices), graphics processing units (GPUs), displays and computing devices; b) distribution companies including the broadcasters of esports; c) payment companies given the increasing shift to online and mobile games; and d) carriers and platforms like telecom operators, which provide fast data networks and operating systems for both PCs and mobile devices to support the growth of gaming. 14 Shifting Asia: Ahead of the game September 2018

15 esports: A paradigm shift for Asia s gaming industry People visit the stand of Chinese game video streaming platform Douyu, during the 14th China Digital Entertainment Expo and Conference, also known as ChinaJoy 2016, in Shanghai, China. Source: Keystone According to the Oxford dictionary, esports are a multiplayer video game played competitively for spectators, typically by professional gamers. Today, esports are at the cross-section of some of the most powerful online trends like gaming, live streaming and social networking. While esports as a concept has been around for as long as the video game industry has, the strong recent growth in the gaming ecosystem, coupled with faster broadband speeds, has reignited its growth prospects. Unlike traditional sports, which struggle with logistical challenges, organizing esports events is relatively easier. esports are digitally native and are more global in nature compared to traditional sports, which means they re easy to set up and operate unencumbered by TV rights or other challenges. Any player can broadcast their game through in-game live-streaming services, sometimes attracting millions of viewers interested to learn new tricks or to simply cheer on their favorite player. Physical strength is less of a concern in esports, as reaction time and focus matter more. Given these factors, and due to their strong appeal, esports have been attracting significant interest in Asia and globally. According to Newzoo and Bloomberg Intelligence, the global audience for esports has been 395m this year, and Asia Pacific accounts for 51% of global esports fans. The region enjoys a strong fan base, as evidenced by the 60m unique viewers who tuned in to watch the Shifting Asia: Ahead of the game September

16 esports: A paradigm shift for Asia s gaming industry League of Legends World Championship in 2017, up from 43m in This puts the event on par or above many other traditional sporting championships (see Fig. 4). We expect Asia s strong leadership in esports to continue, driven by numerous factors, including: 1. Favorable demographics: The esports industry benefits significantly from the relatively younger dynamics of Asia, where millennials and teenagers are reshaping the entertainment industry. Live streaming of esports has been attracting strong interest in the region due in part to the real-time nature of games, which are generally unscripted. The industry has been able to create a community for game enthusiasts who share common interests. esports offer interactive and immersive experiences through video, voice and text integrated into the streaming platform, and generate further engagement through activities like music shows and outdoor activities. According to Huya, a Chinese streaming video provider, almost four-fifths of the company s users in China registered for its livestreaming gaming unit are years old. 2. Effective game discovery and distribution: Our interviews with leading gaming companies in the region clearly indicate that esports can be used as a strong platform for promotion, which helps both the discovery and distribution of games. From a viewer s point of view, live streaming of esports demonstrates how the game can be effectively played by professionals; whereas from a publisher s point of view, it helps generate strong word of mouth publicity and provides a feedback loop with users. As result, esports help drive the overall growth of the gaming industry through increased engagement. 3. Growth in esports ecosystem: We have seen a noticeable improvement in Asia s esports ecosystem due to a combination of increased investments and innovation. According to CB Insights, the global esports industry is on pace to net USD 5bn in private, disclosed funding through over 350 deals from , with Asia receiving the bulk of the Fig. 4 Major esports events can attract far more viewers than traditional sporting events Total unique viewers in millions Super Bowl World Series Game 7 Source: Nielsen, company websites, Bloomberg Intelligence, as of July 2018 investment. Leading gaming companies are also investing heavily in esports stadiums and developing the ecosystem through investments in professional leagues, production and content distribution. Additionally, the strong improvement in the device eco system, with increased availability of smartphones to view esports and faster speeds (both 4G and broadband), should drive demand for digital content like esports. The ever-increasing prize pool of esports is also attracting more people to the industry. For example, popular esports events for games like Dota 2 or League of Legends have a total prize pool of USD 10 20m, on par with other popular sports events like tennis Grand Slams. 4. Favorable regulations: While gaming regulations are mixed, they are favorable overall for esports in the region. This might be due to the passive nature of esports, for which users watch rather than play games. For example, in 2016, the National Development and Reform Commission in China issued a policy to encourage national and international esports tournaments. China s Ministry of Education has also recognized esports as a major of study for higher education. Other governments in the region also promote the industry through the allotment of specialized esports stadiums and recognition of esports professional athletes. League of Legends World Championship 16 Shifting Asia: Ahead of the game September 2018

17 esports: A paradigm shift for Asia s gaming industry esports viewership can be further divided into two segments: occasional viewers and enthusiasts. According to Newzoo and Bloomberg Intelligence, enthusiasts share should rise from 43% currently (173m people) to 45% (264m) in 2021 (see Fig. 5). Due to the nascent stage of the esports industry, total global revenues are expected to reach USD 906m in 2018, according to Newzoo and Bloomberg Intelligence. North America currently leads esports monetization, accounting for almost 38% of global revenues, while China and South Korea are the second and third-biggest markets, respectively (see Fig. 6). That being said, we expect Asia to be the top revenue generator of the global esports industry in the future, proving to be a key growth driver for the overall gaming industry. This positive view is based on our expectation for increased monetization, which is a vital precursor, and Asia s current leadership in the global gaming sector. In a mobile-first region like Asia, mobile esports should be the next driver of viewership and spending as most esports titles today are still PC-based. In summary, with the quantity of esports content increasing, we believe the industry s monetization should improve in Asia. This is due to a large audience size, the increase in engagement esports offers for advertisers to target a captive demographic, as well as the rise of mobile esports. From an investment point of view, esports growing popularity in Asia should provide interesting growth opportunities. The industry is still in a nascent stage, with most companies still in the private equity space. But as monetization picks up, we see increased opportunities in publicly listed companies. Additionally, esports as a trend should lead to increased spending on hardware due to the rise of competitive gaming. According to Activision Blizzard and Bloomberg Intelligence, esports competitors and viewers spend 30% more on gaming hardware and software than casual gamers. So select gaming hardware companies should also benefit from the esports trend. Fig. 5 esports viewership is surging In millions Source: Newzoo, Bloomberg Intelligence, UBS as of July 2018 Fig. 6 43% Forecast 45% Enthusiasts Occasional viewers % of enthusiasts among total viewers esports market revenue estimate for 2018 Rest of the world 38% USD 906 million % 38% 6% China Source: Newzoo, Bloomberg Intelligence, UBS as of July 2018 South Korea North America Shifting Asia: Ahead of the game September

18 The life of a professional gamer ( ) One can only hypothesize about how the intersection of gaming and society will evolve over the coming decades. We ve had some fun with this topic and tried to visualize such a future, by following the life of a professional gamer from her childhood to her twilight years. By Growing up (child education games) Most schools around the world have integrated curriculums into educational devices. Classrooms become increasingly technologically interactive and engaging. By Growing up (teen gym class) Sports are no longer chained to a physical location. Schools can compete against teams worldwide in a competitive setting. By Growing up (university student competitive games) To earn some pocket money during university, our hero competes in semiprofessional esports leagues. 18 Shifting Asia: Ahead of the game September 2018

19 By Professional gamer The esports industry becomes a major traditional sport thanks to worldwide popularity. The most elite gamers rank among the highest-paid athletes globally. By Olympic games (representing country) esports to be recognized as an Olympic sport. The world watches as nations compete in gaming tournaments. By Retired gamer/consultant The gamification of society extends to the corporate world, with former professional gamers acting as consultants to government and corporate employees. By Grandparent gamer People of all ages connect in the AR/ VR world. This allows grandparents to game with their grandchildren across continents. Shifting Asia: Ahead of the game September

20 Interview This interview contains views which originate from units outside CIO Global Wealth Management. Interview with Henry Dachuan Sha Henry Dachuan Sha Chief Financial Officer (CFO) of Huya Henry Dachuan Sha is the Chief Financial Officer (CFO) of Huya, the largest live-streaming game platform in China. Prior to joining Huya, Sha served as a director of Greenwoods Asset Management from 2015 to From 2013 to 2014, Sha worked as an associate at China Media Capital. Before his private equity career, Sha worked with Goldman Sachs Investment Banking division from 2011 to He received a dual bachelor s degree in electronic engineering and accounting from Fudan University. How do you see the role of live-streaming companies in China in promoting the overall gaming industry? In China, live-gaming streaming gaming platforms are becoming increasingly popular, as they offer a close community for game enthusiasts to share their common interests. Live streaming of game content, such as gameplay, esports tournaments and esports game shows, has attracted many users to platforms like ours. As a result, live-streaming companies in China are able to leverage strong relationships with game developers and publishers as well as popular game broadcasters, esports leagues and players to offer high-quality and engaging game live streams to users. For example, users can interact in live online group activities, through video, voice and text, and participate in real-time in a broad range of topics, such as games, music shows and outdoor activities, thus enjoying an interactive and immersive experience. The proliferation of smartphones has ignited the popularity of live streaming in recent years, as anyone can easily participate as either a broadcaster or a viewer. How does Huya fit into the ongoing esports trend in China? Huya is the largest and most active game live-streaming platform company in China. As of 1Q18, we had 92.9m average monthly active users (MAUs), with an active user spending on average 99mins on our app per day. Mobile MAUs as of 1Q18 stood at 41.5m, representing around 45% of our total MAUs. Our game coverage is quite extensive, with more than 2,600 games covered. We have created an engaging, interactive and immersive community for young game enthusiasts in China. Our rich and highquality game live-streaming content is a magnet for users who share common interests to connect and share their passion on our platform. We closely cooperate with esports event organizers, game developers and game publishers to identify trending esports competitions and secure live streaming rights of matches and tournaments favored by our community. As of 31 December 2017, we had cooperated with over 90 esports event organizers and provided live streaming services for over 360 esports tournament matches since our inception. How different is the esports trend in China versus the West? Based on our experience, the most popular genres in US are racing games, sporting games and shooter games; but in China, online battlefield games and massive multi-player online games are very popular. Also, mobile games are very popular in China, and what is also very interesting to note is unlike in the west, where most audiences watch esports on their PCs or large monitors, in China, audiences prefer to watch esports on mobile phones. In terms of monetization too, there are a few differences. In the west, monetization of the esports traffic is mostly through advertising and subscription model, very similar to how ESPN or other traditional sports companies monetize. In China, it is mostly through the freemium model where audiences access games free of charge but have to pay for virtual items. 20 Shifting Asia: Ahead of the game September 2018

21 This interview contains views which originate from units outside CIO Global Wealth Management. Interview Talking about monetization, could you please elaborate on how you monetize your user base? We monetize our user base mainly through value-added services (VAS) and advertising services. Revenues from VAS are primarily generated from the sales of virtual items that our users purchase on our platform. Users can endorse the broadcasters with the virtual items they purchased, including consumable and perpetual items, which can be utilized to enhance the interactions among the users and broadcasters in real time. Beyond the real-time nature of live streaming where each broadcaster improvises in each livestreaming session, our community interactions generate another form of content. The variety of real-time interactions between viewers and broadcasters or among viewers creates viewer-generated content, which in turn becomes part of the overall entertainment and social experience offered on our platform. Hence, in the future, we plan to further diversify our monetization channels by adopting more creative designs for virtual items, and promote more attractive reward systems and membership privileges to further incentivize users to spend on our platform. For online advertising, we plan to actively promote our advertising services, tap into unutilized advertising inventory and expand our advertiser base. The acceptance in particular in low-tier cities is quite encouraging given the lack of significant entertainment options. The widespread roll-out of broadband networks definitely helps us, which we augment through better user experience by providing high definition content where required. From a regulation point of view, compared to gaming, where players actively engage, live streaming is seen as passive engagement, where audiences may watch during breaks at the work-place, when they are on public transport or during leisure time, so we don t think there are any widespread concerns. Nevertheless, on our platform, we have set up effective operating standards and comprehensive incentive mechanisms to encourage healthy competition, good performance and regulatory compliance. How do you see the acceptance of esports by society in China? esports is driving the professionalization of the entire gaming ecosystem. It is seen more as entertainment, and in some cases government agencies are providing support. Shifting Asia: Ahead of the game September

22 Types of games Gaming can be divided into many sub-groups but for the sake of simplicity, we have broadly divided them into six different types of genres. The list is not exhaustive but provides a basic understanding for general readers. Shooter games are one of the most popular categories, which has sub-genres like firstperson shooter (FPS) and third-person shooter (TPS). Shooter games are fastpaced action games played from the point of view of the protagonist(s), where the player(s) navigates a combative environment using lethal weapons and completes the mission or the quest as scripted in the gameplay. Some of the most influential shooter games include Call of Duty and Halo. Role-playing games (RPG) are another popular genre, in which the player controls a character or a set of characters in an imaginary world. The characters have many abilities like fighting skills or magical powers, and generally the game revolves around a strong storyline. The player s skills and power grow as they gain experience in the game. Some of the most popular RPGs include the Final Fantasy and the Diablo series. Massively multiplayer online (MMO) games refer to an online gaming ecosystem, where thousands of players can participate simultaneously through the internet or shared networks via a one-time purchase or a monthly subscription. The concept goes beyond a single genre like RPGs or FPSs. Players in MMOs operate real-time in a world created by the game company. To survive, they are encouraged to establish or join virtual communities with people from all over the world and use virtual money to purchase merchandise from other players or in-game vendors. The most popular MMO category is the MMORPG, which combines the roleplaying environment of an RPG with an online community. Popular MMO games include World of Warcraft and Blade & Soul. 22 Shifting Asia: Ahead of the game September 2018

23 Multiplayer online battle arena (MOBA) also known as ARTS (action real-time strategy), is a combination of RPGs or shooters and real-time strategy games. The key objective of the genre is to destroy the enemy base as a team rather than as a single character, thus combining the unique skills of every player, or to be the last surviving character in a battle royale. The genre has become very popular in the esports industry, with popular games like League of Legends, Fortnite and Honor of Kings. Casual games are intended for casual gamers and have pretty straightforward rules. The games are meant to engage the players for a short period of time; for example, during commutes (a very common sight these days) or during lunch breaks. While PC casual games like Solitaire were very popular in the past, increasingly mobile games like Candy Crush, Subway Surfers and Angry Birds have become household names. Others include genres that don t fit into the other categories, including sports games like FIFA, racing games like Need for Speed, arcade games like Pacman, strategy games like Clash of Clans, and hybrid games that include a combination of two or more genres. Did you know? Japan s Nintendo introduced Mario, arguably the most recognizable and most beloved fictional gaming character worldwide. Shifting Asia: Ahead of the game September

24 Augmented reality and virtual reality The acquisition of Oculus, a virtual reality (VR) company, by Facebook in 2014 and the success of Pokemon Go, which leverages augmented reality (AR) technology, in 2016 have raised expectations that these two emerging technologies will be the future torchbearers of the gaming industry. However, both technologies are still in their infancy and need to evolve further before they reach an inflection point. Alamy 24 Shifting Asia: Ahead of the game September 2018

25 Augmented reality and virtual reality While AR/VR applications are still in their infancy, we believe these two technologies are set to transform many industries over the next decade. Augmented reality overlays digital imagery onto the real world, while VR refers to an artificial environment normally generated by a computer that can be experienced by the user in a seemingly real or physical way. An example of AR is using a clear headset, like Google Glasses, or a smartphone camera, like in Pokémon Go, to overlay information. Virtual reality uses opaque headsets to immerse the user in a virtual world. Both AR and VR hold promise in three major areas entertainment, gaming/simulation and retail. As the gaming industry is already an early adopter of motion-sensing technologies, we consider it a low-hanging fruit. Interestingly, research is currently underway on converging both AR and VR into mixed reality, where virtual renderings interact with the real world. We believe significant advances in sensor and graphics technologies should accelerate innovation, leading to an explosion of use cases. The combined size of the overall AR and VR industry stood at USD 8bn last year, based on industry estimates (Goldman Sachs), and is expected to reach USD 107bn in While most of today s sales are hardware, the mix of both AR and VR software should rise significantly, in our view, as devices become cheaper and the availability of software content rises. Also, while the industry will likely be driven by VR in the near term, we believe AR structurally holds more promise due to its user-friendly features and potential for scalability. The VR gaming device market can be broadly divided into two categories: slide-on and discrete devices. We estimate nearly two-thirds of devices are slide-on and the rest discrete. Slide-on devices are computationally less intensive and require less upfront investment, as they leverage the strong processing power of the host smartphone including its superior resolution and gyroscopic sensors. Examples of slide-on devices include Google Cardboard and Samsung Gear VR. Discrete devices are expensive due to their better computational power and deliver high-quality VR/AR experiences. Discrete devices still need a host device like a game console or PC to play games. Some popular discrete devices include the HTC Vice and Oculus Rift. In the future, it is likely that a third category of VR gaming devices may emerge in the form of stand-alone devices that do not need any host device, but their high costs will likely be a key deterring factor. The AR device market today is largely centered around smartphones, with popular games like Pokemon Go leveraging their AR capabilities. More AR devices should emerge in the future, like glasses, watches and other devices. Key obstacles today include poor battery life and other technical limitations around tracking and field of view. Despite a promising start, the adoption of AR and VR in gaming has been mixed so far. First, expensive pricing for both device markets is inhibiting their ability to attract a wider use base. Second, their ecosystems are still relatively immature, which is due to technical limitations coupled with a lack of significant investments, unlike in other industries like e-commerce or social networking. Third, there are some user interface issues that need to be solved; for example, addressing motion sickness from VR or poor resolution or inaccurate vision in AR. We believe most of these problems are initial teething issues and will eventually be solved. As such, while the prospects for AR and VR in gaming are significant, the ecosystem still needs to evolve. According to company reports and Bloomberg Intelligence, the global base of gamers using installed AR and VR technologies is close to 20m, which is a very low penetration. Assuming each gamer buys two AR/VR games per year with an average price of USD 30, AR/VR gaming industry revenues are close to USD 1.2bn globally. Asia s share should be significantly lower given the lower penetration of AR/VR in emerging Asia, while developed Asian markets like Japan likely fare better. Nevertheless, as highlighted above, these technologies could present interesting growth opportunities for the region s gaming industry in the long run, once the initial hiccups are resolved and when pricing becomes more attractive. Fig. 7 Combined market size of AR and VR industry In USD bn Source: Goldman Sachs, UBS as of August 2018 Estimate Shifting Asia: Ahead of the game September

26 How Asian gaming is at the cusp of major technological changes istock Our positive view on Asian gaming is largely based on the significant untapped opportunities in terms of user growth and increased monetization per user. Still, with a revenue forecast of USD 200bn by 2030, it is going to be a major task to generate an additional USD 140bn per year (from USD 61bn) during this timeframe. History has demonstrated that new technologies often enable such a rapid increase in addressable markets. For instance, the PC industry leapfrogged due to the new mobile technology of laptops and the e-commerce industry boomed due to advent of shopping apps. The good news is Asia s gaming industry has such key enabling technologies in place today, which should help to catapult the industry s growth prospects. We divide these key technologies across four broad areas: a) development, b) discovery, c) interaction and d) engagement. On the development front, the Asian gaming industry is at a crossroads as both existing and new technologies continue to evolve. Today, most of the revenues in Asia are generated by a small group of hardcore users who spend significant sums on major gaming titles. Additionally, games are being developed in such a way that the majority of monetization is driven in the earlier part of the game s lifecycle as part of appstore monetization strategies. However, most gaming developers and publishers have realized there is currently a long tail of non-paying gamers in Asia who are willing to pay if they are presented with the right game. For example, the average consumer in Asia subscribes to music or video streaming services, a business model that barely existed in the previous decade. 26 Shifting Asia: Ahead of the game September 2018

27 How Asian gaming is at the cusp of major technological changes Against this backdrop, gaming as a service should gain traction as new technologies evolve. Cloud gaming, despite today s latency, has significant potential in the region. This segment is powered by a centralized base of super-computers, which provide the computing necessary for resourcehungry gaming applications, sparing Asian buyers from sourcing or building expensive PCs or consoles. Indie games, typically developed by small and unaffiliated studios, could also tap the huge potential by partnering with the region s leading publishers. For example, Minecraft, a popular indie game that was acquired by Microsoft for USD 2.5bn, has garnered 60m users in China. The evolution of launcher-based games, which bypass traditional appstores, should also be monitored given the likely increase in profitability for developers/publishers; though this segment may be subject to increased cyber-security risks. Finally, artificial intelligence can transform the game development industry by handling the heavy lifting like repetitive programing or testing, and leaving the creative parts like design or storyline development to developers. Fig. 8 New technologies for gaming Engagement Source: UBS, as of August 2018 Development New technologies Interaction Discovery In terms of discovery, i.e. the act of users discovering new games, we believe esports (see esports chapter) will be a key catalyst. Also, we believe artificial intelligence will be a key discovery tool for doing things like recommending the right game based on user behavior or finding and recommending the right opponents in an online environment. For more details, please read the interview with Tencent on page 12. Before the arrival of faster internet speeds, most of the action in the Asian gaming industry was seen in bustling gaming cafes. In fact, the unique social nature of Asian gaming owes its origin to these gaming cafes, where gamers regularly interacted with fellow gamers through various competitions. Today, most of the gaming happens in a living room or on a mobile phone, but the interaction is still there. While the internet has allowed text and voice chatting while playing online games, thanks to new technologies like facial recognition or voice recognition, the socalled man-machine interaction has increased significantly. For example, games today are built in such a way that based on facial expressions, the difficulty level of a game can be changed realtime; and in an action game, voice-based instructions are effectively used like real-life orders. Finally, given our view that rising engagement should be a key future driver for the Asian gaming industry, we expect gaming companies to exploit new technologies. For instance, unlike today s games, AI can regularly gauge the interest levels of the player and make it more interesting by, for example, skipping mundane tasks in the game or automating them. The introduction of other services into gaming, including high-quality ads, potential payment options like blockchainbased tokens, and other social networking features, should enhance the gaming experience, increase user engagement and, in turn, improve monetization. In summary, with artificial intelligence at the forefront, we believe the emergence of new technologies could extend Asia s gaming leadership through increased game availability and engagement. Shifting Asia: Ahead of the game September

28 Interview This interview contains views which originate from units outside CIO Global Wealth Management. Interview Alan Hellawell Alan Hellawell joined Sea as Group Chief Strategy Officer in October 2017 from Deutsche Bank, where he led the investment bank s Asia TMT research group for 11 years. Alan has developed in-depth knowledge and insight into a wide range of business models across the Asian internet and e-commerce landscape. Alan has supported many of China s largest internet companies from their early, private stages through IPO and beyond, and collaborates with the region s leading VC and PE firms. Alan Hellawell Group Chief Strategy Officer of Sea Alan managed a team of six internet analysts at Deutsche Bank, and a broader team of 25 Asia TMT analysts. He was ranked Deutsche Bank s #1 Asian analyst (out of 120) for the last seven years of his tenure. Prior to Deutsche Bank, Alan spent five years as Managing Director and co-head of Research at Lehman Brothers. Prior to Lehman Brothers, Alan spent several years in optical networking with Zaffire Communications and Lucent Technologies. Alan received an undergraduate degree in history and East Asian studies from Princeton University, and an MBA and Master s degree in East Asian studies from Stanford University. How do you see the gaming industry s growth prospects in Southeast Asia (ASEAN) vs. China? Compared to Southeast Asia, China s online games industry has benefited significantly from the sheer size of its population and relative homogeneity. Southeast Asia, in contrast, has 600-plus million people spanning 10 different countries, some of which have distinct sub-groups and sub-demographics. Southeast Asia s gaming market has historically been weighed down by issues such as lower internet penetration and generally weaker infrastructure (e.g. slower data speeds) all of which are necessary to develop a large and vibrant online games community. However, what we are now seeing in Southeast Asia is that the industry here is leap frogging into the mobile age, and this is driving a rapid growth rate that would not have been possible a few years ago. In particular, rising mobile device penetration, which many have previously underestimated, and robust 4G networks have played significant roles. We have seen great progress in markets like Indonesia, which has one of the lowest fixed broadband connection rates in the world, in terms of the infrastructure needed for a thriving gaming industry. It has made up for lost time in the mobile age. In particular, we have seen some very encouraging activity in genres like massively multiplayer online (MMO) games as better mobile data connections, penetration rates and connectivity speeds create better gaming experiences. So, in many ways, Southeast Asia is making up for lost time. However, we still think market penetration is low and the industry has huge scope for growth. In more advanced markets like China, South Korea and Japan, on any given day 8 10% of the population might be playing the most popular game of the day the leading title Honor of Kings for example was probably played by more than 10% of the population of China at its peak. We have yet to cultivate that size of following in most Southeast Asian markets. We have been present in Southeast Asia for nine years now, and we have seen penetration rates pick up dramatically. But when you consider the growth rate of the Chinese gaming industry, we believe the ASEAN gaming market still has huge scope for growth and can reach or even exceed the industry growth forecast of 20 30% over the next five years. In markets like Vietnam and Indonesia, revenue growth is being driven by sharp increases in new users. We think these markets are heading toward a very healthy rate, with new gamers coming online every day. Gaming is one of the first things they do when they purchase a new smartphone, and this is a big driver for the gaming industry in many countries in our region. New gamers generally increase their discretionary spending on gaming with time. So there will be growth in revenues too, as this new generation of gamers continues to grow and mature. There are other trends like the universal appeal of esports, which in turn helps to broaden and deepen gaming in Southeast Asia. 28 Shifting Asia: Ahead of the game September 2018

29 This interview contains views which originate from units outside CIO Global Wealth Management. Interview What are the subtle differences between the various ASEAN gaming markets? We would describe most of these differences to be more nuances than profound differences. For example, an Indonesian gamer might prefer first-person shooters while a Vietnamese or Thai gamer might prefer mobile online battle arena games but these distinctions are not huge or mutually exclusive. We have built up a kind of basic value proposition around the games our customers play, in which we localize them to the unique contours of the market we represent. For example, in FIFA Online, we knew that users in markets like Vietnam, Thailand and Malaysia would be more engaged with the game if it had more locally relevant content. So we worked with the developer, Electronic Arts, to include the national team for each of these markets as a playable team, as well as local language commentary and even local language crowd cheers. We work with all of our developer partners to identify and execute these opportunities to build a highly engaging locally relevant game experience. How do you see the prospects for esports in ASEAN? Garena was the first company to start building esports leagues in Southeast Asia almost a decade ago. As a result, we believe we are not only one of the first but also the largest esports platform in the region. We started to build esports networks around League of Legends many years ago, and we have expanded to other titles, sometimes through partnerships and sometimes by ourselves. The esports industry in our region is still young and may not yet generate significant revenues on its own. However, we believe it forms a very important component of the longer-term expansion and popularity of titles like League of Legends and Arena of Valor. Garena organizes Southeast Asia s largest esports tournament in Bangkok every April or May, called Garena World, and we organize some of the most popular successful leagues around the region for titles Like League of Legends and Arena of Valor from amateur and campus level all the way up to professional. Right now, our aim is to use these events to boost user engagement with these titles this is the power of esports. We are also working with leading brands which use these events to tap into the predominantly young and highly engaged user base for our games. We think advertising will continue to grow strongly, as popular consumer brands can leverage these titles to access important demographic data, while large numbers of ancillary products can be sold in these kinds of events although it s still at an early stage. The professional leagues organized in the West in the US for instance have evolved over decades. In our region, the trends in a lot of esports leagues, which have developed over many years and decades in the West, are being compressed into just months, and we are seeing significant sustained growth in both participation and audience levels for our tournaments. As a result, we believe that esports will probably be one of the most prominent secular trends in the broader internet space for next the 10 or 15 years. How do you see the gaming industry leveraging some of the new technologies? Some of the most exciting advances in technology for the entertainment sector often emerge first in video games, and we are always looking at ways in which we can utilize new technologies. The fundamental principle we look at is simple do they enhance the experience for our users? Some of the areas that we re watching closely include artificial intelligence and virtual reality, where we have seen some encouraging traction as the number of games using either technology has increased. In our region, however, we believe it s still very early in the development cycle for these technologies. Right now, our primary focus is on giving the widest possible audience in Greater Southeast Asia access to the highest quality games, and providing them with a smooth and enjoyable user experience. So we re also looking at how we can take advantage of the growth in e-wallets, for example, to make it easier for our users to pay for in-game items. This can be a real challenge in Southeast Asia where more than two thirds of people don t have a credit card. Shifting Asia: Ahead of the game September

30 What does gaming mean for Asian society? Despite the rising popularity of video games, it remains a controversial topic in Asian society. In particular, the addictive nature and violence of some games are often cited against gaming as an entertainment option. At the other end of the spectrum, gaming proponents cite benefits from the social nature of games, including the ability to learn and compete in an almost real-world setting. While the debate is never-ending, governments in the region have acknowledged the importance of gaming to society both in terms of its entertainment and commercial value, and have recognized the need to regulate the industry. For example, in South Korea, under the Youth Protection Revision Act, which is popularly known as the Shutdown or Cinderella Law, children under the age of 16 are Alamy 30 Shifting Asia: Ahead of the game September 2018

31 What does gaming mean for Asian society? prohibited from playing video games between midnight and 6AM. Similarly, the governments in China and Japan have responded to gaming excesses by promoting rehabilitation programs. On the other hand, the governments in Korea, China and some other Asian countries also support the gaming industry through incentives to esports industries and gaming start-ups. Hence, we believe the gaming industry will continue to have a love-hate relationship with governments, with policymakers tightening regulations in the case of excesses while supporting industries to boost economic growth and employment. Accordingly, our estimates of the Asian gaming industry growing by an average of 9.5% a year from versus the mid-teen growth rate currently takes into account some moderate regulations. Our estimates imply that gaming as a percentage of entertainment spending will reach a high-teens share in 2030 versus today s mid-teens rate, which we think is reasonable. Negatives aside, one major positive for society is that the growth in Asia s gaming industry should boost employment opportunities. According to the Entertainment Software Association, the gaming industry employs 220,000 people in the US. Based on that estimate, we expect gaming jobs in Asia to be 3 4x that figure given its bigger ecosystem and the large number of companies in the region. With artificial intelligence likely to automate many jobs in the future, we believe the creative nature of the gaming industry should provide new avenues for employment. For example, as highlighted in our Life of a gamer section, in the not-so-distant future, there will likely be dedicated professionals involved in full-time gaming who represent their countries at major sporting events. Gaming should also be a subject for study at universities worldwide. Already, universities in many nations, such as China s Lanxiang Technical school, offer esports degrees. The rising trend of gamification, which is the process of using gaming elements to engage and motivate participants in non-game contexts, could also have beneficial effects for society. In the healthcare sector, for instance, gamification can be used to encourage users to exercise and stay healthy. Gamification can be used to drive employee productivity at work and to promote healthy competition in school. In summary, while gaming provides benefits like job creation and gamificaiton, regulators need to check the imbalances of excessive gaming and its influence on children. It will therefore be crucial that policymakers find the right balance between supervising the negative effects while encouraging the positive ones. Fig. 9 Top games across all platforms by total digital revenue globally PC Console Mobile Dungeon Fighter Online Fortnite: Battle Royale Honour of Kings League of Legends FIFA 18 QQ Speed Crossfire Grand Theft Auto V Pokemon GO Fantasy Westward Journey Online II Call of Duty: WWII Knives Out Fortnite: Battle Royale Tom Clancy s Rainbow Six: Siege Fantasy Westward Journey PlayerUnknown s Battlegrounds No Man s Sky Clash Royale World of Warcraft (WoW) The Crew 2 Fate/Grand Order World of Tanks (WoT) Far Cry 5 Monster Strike Counter-Strike: Global Offensive (CS : GO) Tom Clancy s Ghost Recon: Wildlands Candy Crush Saga DOTA 2 NBA 2K18 Clash of Clans Source: Superdata, UBS, as of 23 August 2018 Shifting Asia: Ahead of the game September

32 Gettyimages How investors can participate in Asia s gaming industry With Asia leading the global gaming industry s revenues, most global gaming companies are leveraged to the region s strong growth prospects. With a combined market cap of more than USD 1trn for gaming and related companies, we see a diversified way to participate in the booming Asian gaming through regional and global companies. While the industry is still exposed to earnings volatility around product cycles and game launches, the increasing recurrent nature of gaming revenues should lead to steady growth in the long term. According to Bloomberg, trading at a 20x forward price-to-earnings ratio on average, publicly listed gaming companies are expected to grow their earnings by 22% over the next 12 months, highlighting their superior growth. Broadly speaking, we see four major ways to invest in the Asian gaming industry. 1) Gaming internet Unlike the West, most games are played online in Asia, which explains why some of the leading gaming publishers in the region are internet companies. Most of them not only operate as gaming internet companies but also as portals across segments like gaming, social networking, e-commerce, advertising, etc. Thanks to their unparalleled reach and network effects, the leading platform companies in the region have become the partner of choice for leading global companies for publishing and distributing major titles. With gross margins around 65%, the leading gaming internet companies in Asia continue to post above-average growth. 32 Shifting Asia: Ahead of the game September 2018

33 Global e-leisure Chief Investment Office WM 18 July :09 pm BST Alexander Stiehler, CFA, Analyst, Andreas A. Tomaschett, CFA, Analyst, We see a structural shift in consumer behavior toward increased spending on experiences. We think this will play out through increased spending on leisure, digital entertainment (e.g. video games), social media and other topics in our e-leisure theme. We recommend investments through traditional areas like travel and leisure, but also highlight new opportunities in areas like video games, which provide investors exposure to millennials, one of the hardest consumer groups to reach. Our investment thesis is supported by record-high consumer confidence in many regions, falling unemployment, rising Source: gettyimages wages and low interest rates. These result in increased disposable incomes and higher consumer spending. As these trends are not limited to specific regions, we Further readings: launch Global e-leisure as a global theme to benefit from e-commerce, published 1 June 2018 these trends. We recommend a diversified approach across Silver Spending, published 19 April 2018 subsectors. European leisure flies high, published 3 January 2018 Our view Emerging market tourism, published 14 Just owning a car is not enough anymore. Consumers want to visit November 2017 new places, try new things, compete online with friends, or shop whenever and wherever they want. We see a structural shift in Fig. 1: Strong growth in e-sports enthusiasts consumer behavior toward increased spending on experiences like and revenues leisure, digital entertainment (e.g. video games) and social media, Estimates for e-sports revenues (in USD billions, which results in various interesting investment opportunities. lhs) and enthusiasts (in millions, rhs), Cruises, for example, offer a combination of on-board entertainment and on-land excursions that increasingly appeals mn to younger people. Consumers are also spending more on video games than ever before. New channels and business models (e.g. 191 mn 200 e-sports, see Fig. 1) enhance revenue opportunities in the coming years, making gaming one of the most attractive end-markets in 120 mn 1.5 bn 100 the consumer sector. Over the last few years, the e-sports market bn 50 has more than doubled, and we expect it to double again by bn Half of the e-sports enthusiasts are between the ages 21 and a desirable target group for many brands and a good way for Total e-sports revenues investors to get exposure to this consumer group. Number of e-sports enthusiasts (rhs) From a macroeconomic perspective, the theme benefits from falling Source: Newzoo (2017 Global esports Market Report), UBS, estimates, as of July 2018 unemployment and rising wages, resulting in record-high consumer confidence. We expect consumer sentiment to remain high and global consumer spending to grow around 4% in We forecast spending on e-leisure in particular to grow even faster. In our view, investors should seek exposure to traditional as well as new end-markets within e-leisure in a diversified way. We expect strong earnings growth of companies in these areas to lead to this theme's outperformance of global equities. This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document. Enabling technologies Chief Investment Office WM 21 May :04 pm BST Sundeep Gantori, CFA, CAIA, Analyst, sundeep.gantori@ubs.com; Kevin Dennean, CFA, Technology Equity Sector Strategist Americas Tech devices and advances have disrupted every aspect of our lives, and spending on the underlying enabling technologies that enable their development and production should remain high over the next decade as both disrupting and incumbent companies continue to invest to grab or defend market share. We have identified five mainstream enabling technologies artificial intelligence (AI), augmented reality/virtual reality (AR/VR), big data, cloud computing and 5G that are set to transform many industries over the next decade. We expect them to grow in aggregate by an average 12.8% annually, Source: UBS from USD 420bn in 2017 to USD 1.1trn in Hence, we believe enabling technologies offer solid longterm growth as technological disruption is an irreversible trend. Investors can take part in this by investing in a diversified way in our theme of enabling technologies, with leading software and semiconductor companies emerging as winners. Our view Disruptive innovation is a term coined by Harvard University professor Clayton Christensen. It refers to processes in which a product or service takes initial root in simple applications at the bottom end of a market before moving relentlessly up the value chain and eventually displacing established competitors. Trends like e-commerce, fintech and automation have demonstrated how technology can dislocate markets in a short time span. Incumbents now realize that disruption is an irreversible trend and are adapting to the new normal according to the long-standing principle "if you can't beat them, join them." As a result, interest from technology disruptors and incumbents alike in investing in enabling technologies (ETs) that drive innovation is increasing. The five mainstream ETs we have identified as likely to create significant economic value over the next few years include AI, AR/VR, big data, cloud and 5G. For example, an AI chatbot can help a bank and a tech disruptor both to improve their fintech offering, while AR/VR can aid a retailer and a tech company in bettering their e-commerce offerings. We expect these five ET industries to grow by an average 12.8% annually, from USD 420bn last year to USD 1.1trn in We see enabling technologies as one of the best ways to invest in technological advances and expect a double-digit rate of earnings growth. Investors, in our view, will be best rewarded by taking diversified exposure to companies involved in ETs. Software and semiconductor companies with superior pricing power and high entry barriers should fare particularly well, in our view. This report has been prepared by UBS AG and UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures that begin on page 19. How investors can participate in Asia s gaming industry 2) Gaming software: Most gaming software companies are based in developed countries like the US and Europe, and either sell their games online or partner with regional gaming internet companies to publish/distribute their games. The key change in the industry has been a shift from physical software distribution to online distribution, which helped gaming software companies gross margins improve from the 60s to the 70s. Thanks to their strong intellectual property, gaming software companies, although seldom based in the region, provide a unique opportunity to participate in the region s strong growth prospects. 3) Gaming semiconductors: In the gaming industry, semiconductors play a vital role in driving the user experience, by improving the visual quality of game graphics, increasing the frame rate, and improving realism in gaming through the use of 3D software and algorithms. With increasing sophistication of gaming due to powerful games like battlefield or MMORPG, graphics content should continue to improve as gamers prefer a better user experience. The shift to gaming as a service should boost further spending on gaming chips, as games can be accessed through thin clients like desktops or laptops with image processing done remotely at a server level. Gaming semiconductor companies also enjoy strong pricing power, with gross margins in the 70s. 4) Gaming hardware: Gaming hardware companies consist of gaming system companies, which include console and gaming PC makers and peripheral makers, which supply peripherals like high-precision mice, customized keyboards, audio devices, controllers, etc. According to Activision Blizzard and Bloomberg Intelligence, esports competitors and viewers spend 30% more on game hardware and software than casual gamers, so gaming hardware companies benefit from the trend of esports and gamers seeking better user experiences. However, with gross margins only in the 20s, gaming hardware companies don t exhibit strong pricing power in the region. With a diversified group of gaming companies available in the listed space, we believe investors should be able to capture superior growth opportunities in the Asian gaming industry. In particular, Chinese internet gaming companies and US-based software and semiconductor companies stand to benefit due to their superior margins, whereas we see limited opportunities in gaming hardware companies due to their lower margins. Also, with many companies still not yet listed, we believe opportunities are available through the venture capital and private equity route. For further details, please refer to the below CIO investment themes. Equity markets Longer Term Investments Global e-leisure Published 18 July 2018 Enabling technologies Published 21 May 2018 Shifting Asia: Ahead of the game September

34 August 2018 Chief Investment Office GWM Independent Investment Research April 2018 Chief Investment Office GWM Independent Investment Research Chief Investment Office WM September 2017 Chief Investment Office WM April 2017 Shifting Asia UBS CIO s Shifting Asia thought leadership series takes on the major trends shaping Asian markets and how they could impact investors over the next 5 10 years. Previous editions: a b a b China s biotech revolution Shifting Asia The road to cashless societies Shifting Asia Insurtech Shifting Asia How artificial intelligence will transform Asia Shifting Asia China s biotech revolution The road to cashless societies Insurtech How artificial intelligence will transform Asia Scan code or click here Scan code or click here Scan code or click here Scan code or click here 34 Shifting Asia: Ahead of the game September 2018