Asia gaming sector Report Interpretation

Overview

BofA Global Research presents a regional gaming-sector view spanning China, Japan, Korea and Southeast Asia. Its core conclusion is that resilient player spending, a broad release slate, more recurring monetization and early AI adoption create a favorable medium-term growth backdrop, although regulation, execution, competition and title concentration remain important risks.

Core views

The report argues that Asia gaming offers several distinct but complementary growth propositions. China combines resilient spending, durable evergreen games and rising overseas revenues; Japan is benefiting from recurring revenue, stronger intellectual-property monetization and margin expansion; Korea retains high monetization anchored by MMORPG fandom while entering a stronger launch cycle; and Southeast Asia is a younger, mobile-first market where Garena remains the key listed platform. Across the region, BofA considers deep multi-genre pipelines a central support for its constructive sector view. China is presented as the clearest near-term regulatory and demand improvement story. Domestic approvals totaled 1,319 in January-August 2026, including 209 in August, compared with 1,050 approvals by August 2025, improving visibility on future content. July industry revenue was RMB31.1bn, up 7% year on year and 4% month on month; mobile gross billing was RMB23.1bn, up 8% year on year and representing 74% of the market, while Chinese developers generated US$2.0bn overseas, up 19% year on year. The report favors online games over other entertainment verticals because it sees resilient average spending per paying user, longer-lived franchises, stable competition and reasonable valuations. It expects a structural rerating of China online gaming from 10-15x P/E toward 20x P/E. Company and title data underpin that China view but also show differentiation. Honor of Kings and Delta Force had July DAU of 47.2mn and 31.3mn, up 11% and 62% year on year, while several older titles declined. NetEase's Eggy Party DAU rebounded 45% month on month to 6.8mn and time spent rose 84% month on month to 21bn minutes. BofA expects 2Q26E total game-revenue growth of 10% for Tencent, 7% for NetEase and negative 11% for Bilibili. Tencent and NetEase are preferred for their mix of evergreen titles, visible pipelines and AI-related operating leverage. AI is described as an enabler rather than a substitute for creative game development. Tencent is deploying AI across animation, autonomous agents, testing, voice translation, NPC interactions and live-service updates; NetEase is applying it from concept creation through operations; Bilibili uses it in discovery, recommendation and advertising; and Garena uses Google's AI tools for productivity, localization and personalization. The report's mechanism is that AI can lower development costs, accelerate content production and deepen player engagement, while human creativity, storytelling and community remain essential differentiators. It sees room for positive surprises from better adoption, particularly among Chinese publishers. Japan's thesis rests on a structural improvement in earnings quality. Aggregate sector operating profit reached a record ¥370.6bn in April-June, up 75% year on year, and aggregate operating margin has reached about 19%, above the approximately 17-18% pandemic-era peak. BofA attributes this to recurring, higher-margin revenue rather than a temporary stay-at-home demand surge: Nintendo's digital sales mix is 61.5%, Konami benefits from live services, and Capcom increasingly relies on repeat sales. Although Konami and Capcom trade at 24x and 28x FY3/27E consensus P/E, respectively, the report argues premium valuations are justified by this structural margin improvement and expects further upside from digitalization and broader IP monetization beyond FY3/27. The report also assesses generative AI's longer-term impact on Japanese developers. It argues that lower asset-production costs could shift value toward proprietary IP, compute infrastructure, communities and experiential game design. Square Enix and Koei Tecmo could gain materially through margin improvement and faster pipelines; Bandai Namco and Konami could reinforce IP-driven value and high-profit models; Capcom could raise mid-tier titles' quality through its RE Engine; and Nintendo is viewed as relatively insulated because its integrated hardware-software design and gameplay mechanics are difficult to commoditize. In Korea, BofA emphasizes durable MMORPG monetization and a stronger 2026-27 launch schedule. MMORPGs continue to dominate top-grossing charts, while PearlAbyss's Crimson Desert sold more than 6mn copies. Krafton's PUBG remains among Steam's top sellers for six consecutive years and stayed in the Top 10 for concurrent players for seven years; its 2025 peak concurrent users recovered to 1.347mn. PUBG Mobile recorded 82mn MAU in 2026 year to date, and PUBG Mobile and Peacekeeper Elite ranked No. 10 and No. 18 in the January-August 2026 annual top-grossing chart. BofA expects Krafton's non-PUBG titles to rise to 22-23% of revenue in 2027-28 from about 10% in 2025, with PUBG revenue growing at a 4% CAGR and non-PUBG revenue at a 63% CAGR over 2025-28. Korean peers add a recovery and launch-cycle angle. Netmarble is described as structurally stronger through improved publishing, a diversified pipeline, cost discipline and deleveraging; BofA forecasts 11-12% operating margin in 2026-28E after losses in 2022-23. Expected net debt falls below W192bn in 2026 from a W1.6tn peak in 2022, while net debt-to-equity is projected to decline from 25% in 2023 to 3% in 2026E. However, the report notes mounting competition in Chinese shooters, possible consumer migration toward short-form video, and the still-unproven commercial scalability of physical AI. Southeast Asia is smaller but growing quickly, with a population of roughly 680mn that is young, digital-native and mobile-first. The regional game market generated more than US$5.6bn in 2025 and is projected by Niko Partners to reach US$7bn by 2030E, with players exceeding 300mn during 2026. Garena's Free Fire remains the dominant listed exposure: despite being in its ninth year, it draws more than 100mn average DAU, while India and Indonesia represented about 42% of global MAU in July 2026. Collaborations, a planned third Naruto collaboration in 3Q26 and the tenth-anniversary event in 2027 are identified as drivers, but Garena's heavy dependence on Free Fire remains its principal limitation. For valuation, BofA uses company-specific earnings multiples and sum-of-the-parts approaches. Tencent's gaming business is valued at 15x 2026E P/E within an SOTP; NetEase at 15x 2026E P/E plus net cash; Capcom and Konami at roughly 27x FY3/27 earnings; Krafton at 14x 2027E P/E; Netmarble at 19x 2027E P/E; and Sea's gaming business at 12x 2027E EV/EBITDA. The report notes global gaming peers average roughly 10x EV/EBITDA and 15x P/E on 2027E estimates, while valuation premiums are tied to franchise durability, recurring monetization, earnings growth and execution visibility.

Analysis framework

The report compares market size, platform mix, regulation, monetization, game pipelines and AI adoption across four Asian regions. It then tests the sector thesis with game engagement, grossing and ranking data, company operating trends and valuation frameworks including P/E, EV/EBITDA, DCF and sum-of-the-parts analysis.

Methodology notes

• Industry AnalysisSupply-demand framework

  Regional gaming-market comparison using approvals, consumer spending, player engagement and release pipelines.

  The report links regulatory approvals and game-release supply with player demand, monetization and revenue growth across China, Japan, Korea and Southeast Asia.

• Industry AnalysisVolume-price decomposition

  Use of DAU, MAU, time spent, gross billing and ARPPU to assess game performance.

  Engagement measures indicate player scale and retention, while grossing and spending measures show monetization, allowing the report to distinguish title-level momentum.

• Valuation methodsP/E and PEG Valuation

  P/E multiples applied to forecast earnings for several covered gaming companies.

  The report compares forecast P/E multiples with peer or historical levels and relates premiums or discounts to growth, margins and franchise durability.

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Sum-of-the-parts valuation for Tencent and Sea.

  The report values individual businesses using different multiples, then combines them with cash, investments or other adjustments to derive a company value.

• Valuation methodsDCF (Discounted Cash Flow)

  Ten-year DCF model for Nintendo.

  The model values Nintendo through projected long-term cash-generation capacity, with the resulting price objective implying a multiple of peak FY3/29 EPS.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Tencent Holdings

  Preferred China gaming exposure through evergreen franchises, pipeline visibility and AI deployment.

  Strengths

  Diversified domestic and international portfolio, live-service capabilities and AI initiatives.

  Weaknesses

  Game growth is expected to slow to 8% in 2026E and 2027E from 22% in FY25.

  Comparison

  Online games valued at 15x 2026E P/E in BofA's SOTP.

  Risks

  Regulation, weaker new-game momentum, investment spending and competition.

• NetEase

  Preferred China gaming exposure with greater new-title optionality.

  Strengths

  Evergreen franchises, visible pipeline, AI adoption and expected gross-margin improvement to 75% in 2026E from 70% in 2025.

  Weaknesses

  Title performance remains mixed across games and geographies.

  Comparison

  Valued at 15x 2026E P/E plus net cash.

  Risks

  Legacy-title deterioration, uncertain new-game popularity, regulation and rising costs.

• Capcom

  Japan exposure to franchise monetization and repeat sales.

  Strengths

  Strong IP, repeat-sales contribution and efficient RE Engine.

  Weaknesses

  Execution depends on new-title launches and back-catalog sales.

  Comparison

  BofA applies about 27x FY3/27 P/E, supported by 17% FY3/28-29 EPS CAGR versus 10% cluster average.

  Risks

  Launch delays, weaker repeat sales and global economic deterioration.

• Konami Group

  Japan exposure to high-margin live services and legacy-IP revitalization.

  Strengths

  Mobile accounts for about 70% of Digital Entertainment revenue, supporting recurring revenue and earnings durability.

  Weaknesses

  Reliance on card-game and eFootball revenue performance.

  Comparison

  BofA applies 27x FY3/27 P/E, a roughly 35% premium to the coverage average.

  Risks

  Weaker card-game or eFootball revenue and delayed releases.

• Krafton

  Korean gaming exposure through durable PUBG earnings and new-IP diversification.

  Strengths

  PUBG's durable PC and mobile engagement, live-service monetization and planned 2027 releases.

  Weaknesses

  Revenue remains concentrated in PUBG and diversification requires execution.

  Comparison

  Buy rating and W340,000 price objective based on 14x 2027E P/E.

  Risks

  Chinese shooter competition, changing consumer preferences and slower Korean-market recovery.

• Netmarble

  Korean recovery exposure through stronger publishing, new launches and deleveraging.

  Strengths

  Improving hit ratio, cost efficiency and projected 11-12% operating margin in 2026-28E.

  Weaknesses

  Growth remains below the robust 2015-22 period.

  Comparison

  BofA applies 19x 2027E P/E, one standard deviation below adjusted historical average.

  Risks

  Delayed titles, domestic competition and regulation.

• Sea Limited

  Exposure to Free Fire longevity and Garena's regional publishing platform.

  Strengths

  Free Fire's scale, Tencent content access and potential revenue diversification from publishing and self-developed games.

  Weaknesses

  Free Fire contributes more than roughly 80% of Garena EBITDA; e-commerce is the main stock driver.

  Comparison

  Garena valued at 12x 2027E EV/EBITDA, below global peers at 15x.

  Risks

  Free Fire concentration, competitive pressure in e-commerce and fintech asset-quality risk.

Key data

• China domestic game approvals1,319 in Jan-Aug 2026Versus 1,050 by August 2025; supports pipeline visibility.
• China game-market revenueRMB31.1bn in Jul 2026Up 7% YoY and 4% MoM.
• China mobile-game gross billingRMB23.1bn in Jul 2026Up 8% YoY; 74% of market revenue.
• Japan gaming-sector operating profit¥370.6bn in Apr-JunUp 75% YoY and the highest level on record.
• Japan aggregate operating marginApproximately 19%Above the prior pandemic-era peak of roughly 17-18%.
• PUBG Mobile MAU82mn in 2026 YTDThe report expects collaboration events to help maintain the level over the long term.
• Southeast Asia gaming marketMore than US$5.6bn in 2025; US$7bn by 2030ENiko Partners projection cited by the report.

Impact & implications

BofA's sector case is that recurring monetization, franchise depth, stronger release pipelines and AI-assisted development can support earnings growth and defend valuation premiums. The implications differ by market: China benefits from approvals and resilient spending, Japan from structural margin expansion, Korea from launches and established fandom, and Southeast Asia from youthful mobile engagement and Garena's platform reach.

Risks

• China: renewed regulatory tightening, weak new-game performance, deterioration of legacy titles and rising competition.
• Japan and Korea: delays to major franchise launches, weak monetization of new releases and rising development costs.
• Korea: intensifying shooter and MMORPG competition, consumer migration toward short-form content and slower market recovery.
• Southeast Asia: Garena's heavy dependence on Free Fire, which is in its ninth year.
• AI adoption may not produce commercially scalable benefits as quickly as anticipated.

What to watch

• China's game approvals and the conversion of approved pipelines into launches.
• Engagement, grossing and monetization trends for Tencent and NetEase evergreen titles.
• Japanese operating-margin progression, digital mix and repeat-sales contribution.
• Execution of Korean launches including Palworld Mobile, Project Valor, Aion 2 and other pipeline titles.
• PUBG engagement, new modes, collaborations and the contribution of non-PUBG titles to Krafton.
• Free Fire's 3Q26 Naruto collaboration, its 2027 tenth-anniversary push, and Garena's ability to diversify revenue.
• Evidence that AI improves development efficiency, content cadence, live operations and player personalization.