QA record of China Mobile Game's 2023 annual results conference on March 28

In 2023, the actual sales revenue of the domestic game market was 302,964 billion yuan, an increase of 13.95% over the previous year, breaking the 300 billion mark for the first time. The main reasons for the year-on-year increase in revenue and the record high include: many negative factors have clearly subsided during the pandemic, and users' willingness and ability to spend has rebounded; game market version distribution has become normalized, new game products are being sold centrally and explosions have appeared, supporting revenue growth with long-term operating products; and the widespread use of multi-terminal concurrency methods, which clearly contributed to revenue growth.

In 2023, the game industry will also have the following major trends:

1. In 2023, app games faced challenges. The competitive market brought about a marked increase in purchasing costs, but IP is still an important way for app games to effectively reduce customer acquisition costs. Traditional gameplay in app games, and games that are burdensome, are seriously shrinking, while lightweight gameplay is easy to use, then gradually enters a medium to heavy commercial model, and games that adapt to fragmented game time have become a trend in app games.

2. Compared with 2022, users' willingness to pay has increased to a certain extent, but long-term continuous improvement is still needed. As a result, even the most leading manufacturers began to win players by cutting prices and paying benefits, and adopted the “Pinduoduo” style of play. Game design pays more attention to small to medium R ecosystems, and cost-effective commercial designs are also being launched for big R's.

3. In 2023, the number of active users of WeChat games reached a new high, and the Douyin game DAU exploded. According to data released by Massive Engine, the overall market size of mini games in China will reach more than 40 billion in 2023, and will grow further by 2024, with overall expectations exceeding 60 billion.

4. The domestic market is slowing down, and games seen as an opportunity in the past two years have also faced bottlenecks when going overseas. After experiencing a pullback in 2022, the global mobile game market trend stabilized in 2023. Meanwhile, with the increase in overseas manufacturers and the intensification of domestic sales, the cost of overseas purchases rose rapidly. For game makers to go overseas, they must move from entering the product to a deeper stage of localization.

5. Open world is an important game form in the future. It can effectively increase the carrying scale of game users, extend the game life cycle, and increase revenue. Currently, leading manufacturers all have key layouts. The two major elements of open world games, “openness” and “creation (UGC)”, will bring improvements in game length and LTV, and have metaverse elements and mature business models, which are the prototype of the metaverse. Industrial development capabilities, game design, and IP building capabilities are the keys to success in open world games.

6. With its excellent social interactivity and entertainment, Party Game games have become a new trend that has attracted much attention in the game market in recent years. This type of game is leading the market with a growth rate of more than 150%, becoming a leader in the 2023 opportunity category, and the UGC ecosystem has also become a new outlet for the development of the game industry.

7. ChatGPT accelerated the commercialization of AIGC this year, and in addition to being popular, it also helped the game industry: “literature” can change gameplay, let NPCs have their own “feelings”, and make users fall in love with UGC creations; “martial arts” can reduce costs and increase efficiency, saving manpower and time.

Based on our early prediction of industry trends, China Mobile Games firmly focuses on the three business segments of IP game development and global distribution, its own IP operation, and the Guofeng Metaverse platform, and insists on high-quality and high-quality development.

In terms of IP game development and distribution business, high-quality IP can effectively reduce customer acquisition costs and extend the game life cycle, and is an important resource and barrier to competition in the game industry. China Mobile Games has long used the IP gaming strategy as the company's core strategy, laid out IP game tracks ahead of time, obtained rich top IP resources at a lower cost, and continued to launch boutique IP games in collaboration with powerful external developers. In terms of independent research and development, the company uses its own IP+ social ecosystem gameplay games as the core (such as the Three Kingdoms-themed strategy game “City Lord World” and the self-created sports e-sports IP “National Street Basket”) to achieve the long-term vitality of self-developed games; for the current hot mini game market, we fully explore innovative gameplay and exert high-quality IP influence, and continue to launch popular mini game products, making mini games a powerful growth engine for Chinese mobile games; we are also further stepping up efforts to explore overseas markets, with Hong Kong, Macao, Taiwan, Japan, South Korea, Europe and the US as the main positions to continuously launch and expand games The size of revenue in overseas markets.

In terms of operating our own IP, we have Guofeng Xianxia's first IP “Legend of Sword and Fairy”, which is a unique cultural IP with long-term fan cohesion. We are focusing on the future. Under the market trend of cross-border development, film, television, and gamification to increase IP value, along with cross-border cooperation between game IP and the film, television, animation and other industries, Xianjian IP will continue to release many high-quality contents, and can attract and influence more young cohort. Based on the “Legend of Sword and Fairy” IP, China Mobile Games has established an IP game ecosystem with a first-mover advantage and the Fairy Sword IP universe layout, which will continue to expand the value of Fairy Sword IP, and is expected to drive China Mobile Gaming's own value to achieve continuous development.

On the Guofeng Yuanuniverse platform, the world's first Guofeng Xianxia open world game “Fairy Sword World”, which we spent a lot of money to develop, will be launched in 2024. “Fairy Sword World” is an open world game+metaverse platform product based on the world view of China Mobile Gaming's own IP “Legend of Sword and Fairy”. The market space is huge. It is a long-term platform product built by China Mobile Games to give full play to its own IP value and independent research and development capabilities. The launch and success of the product will enable China Mobile Games to have a longer term competitiveness in the industry and achieve leapfrog development of the company.

After the launch of the two games “Ultraman: Assemble” and “Starry Eater: Dawn”, which launched in the domestic market in 2023, the market response was mediocre and failed to achieve good revenue performance. The main reason is that the product gameplay design is too traditional, the quality falls short of players' expectations, and due to the negative factors of changes in the 2023 app game market environment and high purchase costs, it did not contribute significantly to revenue growth in 2023.

Additionally, we launched “All-Star Fight” in Hong Kong, Macau, Taiwan, and Singapore in February 2023. Although the game received first place in the Apple App Store free list, fifth best seller list, and first place in the Google App Store free list in the first month, the game was attacked by hackers soon after it went live, stealing a large amount of in-game currency, causing the game ecosystem to collapse, and revenue declined too fast to bring us significant overseas revenue. We have also carried out an in-depth internal review of the problems caused by the above products, and made corresponding adjustments in the formulation of subsequent product projects and technical operation and maintenance of the products.

In 2024, we have prepared a number of major new tours.

In terms of app games, “Doulo Continent: Shrek Academy”, which launched on January 31, has a monthly turnover of over 100 million. The developer is Shanghai Smart Blade, and the masterpiece “Searle's Light” has a global sales volume of more than 3.5 billion. In the first half of this year, the developer of “Battle to the Top”, which will be launched in the first half of this year, is Shenzhen Yifan, which we have invested in. The masterpiece “Dynasty Warriors” has a monthly turnover of over 100 million dollars. We will also launch “Doulo Continent: Reversing Time and Space” in the first half of the year. The developer Shanghai Lefu Entertainment's masterpiece “Three Kingdoms for Youth” series has sold over 10 billion dollars worldwide. In the second half of the year, new IP games such as “The Daily Life of a Chat Group”, “Naruto: Master Konoha”, and “Three Kingdoms: Legend of Cao Cao” were also launched.

In terms of independent research and development, our wholly-owned subsidiary Wenmai Interactive's first Three Kingdom-themed strategy game “City Lord World” will be promoted with 37 Mutual Entertainment to achieve continuous revenue growth and profit contributions in 2024, and launch the second Three Kingdom-themed strategy game “Code Name: Main Character” in the second half of the year to further expand the size of our Three Kingdom-themed strategy mobile game market. Also, we are developing a new legendary product based on the original successful legendary mobile game “World of Legends of Thunder”, which will also be launched in the second half of 2024; the sports e-sports PC game “National Street Basket” developed by our holding subsidiary Shanghai Zhoujing will enter open beta in the summer of 2024; in particular, our self-developed strategic product “World of Sword” will be tested for a fee in May and will be officially launched within the year. Due to the delay in the launch of independent R&D projects, independent mobile game R&D revenue declined in mid-2023, and gross margin declined, but it can be said that independent mobile game R&D in 2024 will actually lead to a harvest period.

In terms of mini-games, we have achieved a revenue scale of 600 million in 2023. This year, more than 10 mini-game products such as “Love in the Country”, “New Fairy Sword Waving Sword Interview”, and “Naruto: Master Konoha” were launched.

In overseas markets, mobile games will continue to vigorously promote the “Legend of Sword Waving Sword” mobile game in Hong Kong, Macao and Taiwan, and plans to launch games such as “Doulo Continent: Shrek Academy”, “Disruptive Showdown”, “Doulo Continent: Reversing Time and Space”, and “Code Name: FA” in the Hong Kong, Macao and Taiwan regions, and will launch the “True Three Kingdoms Warriors” mobile game in Japan to further increase the scale of game revenue in overseas regions.

We are full of confidence in 2024, and we also believe that the above games that will be launched in domestic and overseas markets will achieve outstanding results, thereby driving a significant increase in revenue this year.

According to data released by Massive Engine, the overall market size of mini games in China will reach more than 40 billion in 2023, and will grow further by 2024, with an overall forecast exceeding 60 billion dollars.

The development of mini-games has the following characteristics: 1. Categories and gameplay are important, and profit methods are diversified. 2. Big platforms are entering the market one after another, and the cake in the mini game market is getting bigger and bigger. Platforms such as Alipay and DiDi are constantly putting out mini-games. 3. First-tier large manufacturers are not fully involved, and second-tier, small and medium-sized mobile game companies have benefited.

Judging from the current survey data, 84% of respondents believe that the fatigue level of gamers is increasing, and everyone is looking for lighter and more diverse ways to play. This is the current change in the psychological demands of gamers as a whole, and mini-games fit exactly this point. Therefore, we believe that the mini game market is not a short-term market, but a market that continues to expand over a long period of time.

The size of the mini game market continues to rise; in fact, there are two main factors. The first is the advantage of traffic. In particular, after all major Internet platforms are interconnected and mutually beneficial, the traffic brought to the mini game ecosystem is very rich. The second is the characteristic of mini-games themselves. Their purchasing cost and promotion advantages are clearly superior to traditional app games. The core reason for this is that the development cycle of mini-games is short, and production costs and purchase volumes are relatively cheaper, so that more small and medium-sized manufacturers can have more opportunities to enter the market.

Minigames have gradually developed in the direction of medium, heavy, and boutique games, and traditional gameplay such as shooters, RPGs, SLG, and MMOs will fully blossom on the mini game circuit.

The mini game business in 2023 brought the Group more than 600 million yuan in revenue and became a new business growth point.

In 2024, mobile games will continue to strengthen the mini game matrix, mainly deepening social ecosystem games such as shootouts, simulation management, and the Three Kingdoms SLG, and using IP advantages to make IP card games, carefully select and carefully select in integrating innovation and exclusive and intermodal transportation of heavy mini games, and bind appropriate R&D teams to cooperate for a long time to create differences and competitiveness.

In 2024, we launched more than 10 mini-game products such as “Love in the Country: Business Life”, “New Fairy Sword Waving Sword Interview”, and “Naruto: Master Konoha”.

In 2023, China Mobile Games will vigorously promote the application of AI in game development, player experience, distribution and marketing, and game operation. Here are some of the developments and achievements of China Mobile Games in AI applications.

In terms of game research and development, mobile game R&D investment reached RMB 370 million in mid-2023, a decrease of 29.7% compared with the same period. This is mainly due to the Group's application of AIGC technology to in-game art production and copywriting, which effectively reduced game R&D costs and improved R&D efficiency. Currently, we are also collaborating with well-known AI companies in the industry to accelerate research on production capabilities for standardized 3D digital assets (including character models and scene models), establish a more efficient 3D content production pipeline, reduce the production cycle and cost of 3D digital assets; develop safe and reliable code development and testing capabilities, improve game development efficiency, and greatly reduce R&D costs.

In terms of player experience, AI intelligent NPCs in “Fairy Sword World” will show corresponding behavior and conversation according to the natural environment, form a natural and realistic social ecosystem, and enhance the authenticity of the virtual world. Players can also use AI technology applications such as AI face pinching, AI voice, AI motion generation, and AI+UGC provided by the product to enrich users' personalized expressions, create vivid performances, rich 3D digital asset content, free communication experiences, and lightweight UGC creation, greatly enrich and enhance players' interactive experiences and stimulate their creativity in the virtual world. Currently, in terms of AI voice, we are collaborating with well-known AI companies in the industry to accelerate research on end-to-end voice interaction methods, so that NPCs can respond more quickly and vividly express emotions, and solve the problems of insufficient efficiency and mood in the previous TTS voice interaction mode. In addition, we are also working with well-known AI companies to accelerate research through SORA-like Wensheng video capabilities to build a UGC video function for players based on the “World of Sword” model, give full play to players' imagination and creativity, and produce a variety of interesting Fairy Sword IP stories for UGC dissemination, bringing huge traffic to “Fairy Sword World”.

In terms of game distribution and marketing, AI is used to complete marketing creative script generation, creative content generation, US advertising video production, and promotion video generation to create the most powerful AI advertising brain, providing the most timely, comprehensive, and understanding of current players and social sentiment.

In terms of game operation, we are also building an AI content intelligence engine, including AI marketing gameplay design, AI front-end code construction, and game operation activity production, etc., to greatly improve the efficiency and effectiveness of game operations.

There are also many difficulties mentioned above that we need to work with top external AI companies to break through. We hope to share more interesting and effective AI results with everyone in the near future.

The reduction in R&D expenses in 2023 is mainly due to:

1. The “City Owner World” project independently developed by the Group has completed R&D during the reporting period, and related R&D expenses have been reduced;

2. The “Fairy Sword World” project applied AIGC technology in R&D to save R&D costs, and completed the main R&D work during the reporting period and entered the testing phase.

3. The “National Street Basket” project also completed the main research and development work during the reporting period, and billing tests have begun.

As a result, R&D expenditure in 2023 was reduced by nearly 30% to RMB 370 million compared to 2022;

In 2024, as each research project enters a stable operation period and the self-research system is built and improved, it is expected that R&D expenses will continue to be stable and there will be no significant increase. As the application of AIGC technology is further deepened, we expect to further reduce R&D costs.

In 2023, our gross margin fell by about 5 percentage points year on year. The main reason was that the revenue of our self-developed game “All-Star Fight” did not meet expectations in 2023, and the Group's game “Thunder Overlord”, which had been on the market for many years, naturally declined, causing the Group's game development revenue to drop, leading to a decline in gross margin.

From the end of 2023 and throughout 2024, the launch of our three self-developed games, “City Master World”, “Street Basket for All”, and “Fairy Sword World”, will intuitively expand the revenue of the company's game development business segment. Coupled with the growth of high-margin overseas business and small game business, it will effectively optimize our profit structure and increase gross profit margin.