新一代工业互联网发展模式与成功实践：数据驱动的新价值网络

www.ubs.com/investmentresearch This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 28. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.  Global Research 27 October 2020 China Internet Sector UBS Evidence Lab inside: efficient gaming traffic operation brings further upside to game companies Comprehensive traffic operation helps drive mobile games growth and return We believe 'traffic operation' (ie, the active acquisition of gamers via placing innovative ads on diverse social media platforms, as opposed to traditional game distribution via app stores) has become an essential channel for mobile games promotion and distribution, contributing to over 50% of total mobile games grossing in China. While traffic operation has lower profitability than traditional app store distribution, we are positive that it provides higher lifetime returns (absolute amount) for certain games, given higher lifetime value (LTV) and grossing. We believe NetEase, Perfect World and Sanqi are well-positioned in this industry trend, given their strength in game quality, branding and advanced traffic operation capability, respectively. We expect a sustained growth and margin trend to drive market confidence in mobile games traffic operation. Increasing adoption of traffic operation via new media platforms Game companies have been increasingly leveraging traffic operation to publish mobile games since 2018 (initiated by Sanqi, followed by Perfect World, Youzu, and NetEase), driven by: 1) crowded traffic on app stores; 2) traffic growth in new media platforms; eg, Douyin and Toutiao; 3) flexibility in game promotion formats and timing; and 4) AI algorithm to better target gamers. As per a UBS Evidence Lab mobile gamer survey (>Access Dataset), 39% of respondents have seen reviews and videos of the games on Bilibili and WeChat Moments, and 36%/32% have seen them on Douyin/Toutiao. Potentially higher total lifetime return under traffic operation vs app store Traffic operation has delivered several hit games (Top 10 on iOS in China) since 2019, represented by Sanqi's Yi Dao Chuan Shi and Ali Games' Three Kingdoms: Strategic. New media platforms can help reach a broader user base and improve gamer activity. We estimate the traffic operation model has a lower margin over the game lifecycle (20-30%) than traditional app stores (around 40%), particularly at the initial stage but higher total game LTV, suggesting higher dollar return. We expect margin recovery after the initial heavy marketing, as games enter the earnings contribution stage. Stock view: prefer Tencent, NetEase, Perfect World and Sanqi We believe gaming companies with premium game qua