According to a research report from Morningstar, Apple has reduced the commission it charges game developers on the mainland China App Store from 30% to 25%, while also lowering the fee for its small program partner plan from 15% to 12%. This follows a recent settlement between Google and Epic Games, which will see Google Play's service fee drop from 30% to 20%. These developments reinforce Morningstar's expectations for margin expansion among Chinese gaming companies and could accelerate this trend. Morningstar generally forecasts a 5 percentage point increase in the gross margins of Chinese gaming firms over the next decade. The firm estimates that the commission cuts from Apple and Google alone could lead to a low single-digit percentage increase in operating profit for Tencent and NetEase-S. Further reductions in commissions would provide additional gains of a similar magnitude. More importantly, iOS accounts for only about 30% of mainland China's game revenue, with the remainder dominated by Android app stores such as those from Huawei and Xiaomi Group-W. If these platforms were to implement similar fee reductions, the operating profit growth for Tencent and NetEase could reach a mid-to-high single-digit percentage. Morningstar maintains its fair value estimate of HKD 800 for Tencent, which it considers to have a wide economic moat, and USD 200 for NetEase, which it assigns a narrow moat, as the firm's long-term projections already incorporate lower app store fees and corresponding margin improvements. Morningstar believes both stocks are significantly undervalued.
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