The Motley Fool

2 Reasons This Chinese Online Gaming Stock is a Buy

If you’re looking for stocks that will benefit from long-term trends, I believe Chinese video game company NetDragon Websoft Holdings Ltd (SEHK: 777) is interesting for investors for quite a few compelling reasons. 

Founded in 1999, the company has risen to become one of Asia’s dominant video game providers, with offices in both Hong Kong and California. And while NetDragon is best known for its online video games Heroes Evolved and Eudemons, it has also managed to position itself as a virtual reality (VR) leader in a range of markets. 

Here are just two reasons why NetDragon is attractive for investors right now.

#1:  NetDragon set to profit from China’s US$64 billion online education market 

Online education has already proven to be one of China’s biggest markets and it’s still growing. Today, the online education market in China is expected to skyrocket to US$64.2 billion in value by 2020.  

This is why NetDragon started investing heavily in its own set of online digital education tools in 2010, forming the subsidiary Huayu Education. Through this subsidiary, NetDragon marketed its first digital education tool Education PPT, which comes with a range of animations and teaching tools. 

In 2015, NetDragon doubled down on its education ambitions with the acquisition of London-based company Promethean for US$130 million. Promethean is considered a world leader in the rapidly-growing global interactive learning technologies market.

In 2018, NetDragon acquired US Education company Edmodo for US$137 million. Both of these acquisitions provide NetDragon with the skills and expertise it needs to infiltrate China’s exciting online education market. 

Today, NetDragon is only selling 101 Education PPT on a business-to-business (B2B) basis. In the future, the company aims to sell to students and parents directly. Since 2015, NetDragon has raised US$52.5 million from new investors to support its online education activities. And then there is NetDragon’s major source of revenue: video games.

#2 NetDragon will be key winner in VR adoption in Asia

All technologies get better over time. Virtual reality hardware is no exception. When VR devices originally hit the market, they tended to be pricey and oversized. Today, multiple VR hardware companies are launching more affordable, compact gaming sets. 

And with this evolution, has come opportunity for investors. The global virtual reality market is now expected to grow at a compound annual growth rate (CAGR) of 37% between 2017 and 2027. 

As a major online video game provider, NetDragon is poised to profit from the coming virtual reality boom. Beyond that, its been working on incorporating virtual reality into multiple facets of its business – not just online gaming. 

NetDragon assisted with the construction of the China (Fujian) VR Industrial Base in 2016, and quickly became an early leader in the Chinese virtual reality market. Within the base, the company focuses on software development, hardware production, and talent training. 

Later in 2016, NetDragon acquired Cherrypicks Alpha. The company also entered into a partnership with ARHT Media. These acquisitions and partnerships have allowed NetDragon to grab a significant share of the VR market. 

All of these early investments will likely pay off for NetDragon in the long run, as virtual reality becomes more mainstream and is utilised in dozens of industries, from medicine to online gaming.

Foolish takeaway

NetDragon has positioned itself for long-term growth in multiple markets and through different technologies. 

The company’s foray into online education will likely pay off handsomely, especially considering that digital tools are becoming a massive part of China’s booming online education market

Beyond that, NetDragon has established itself as a leader in the world of virtual reality. As less expensive consoles hit the market, the company will benefit through its suite of VR games. Outside of that, it will likely benefit from other facets of the virtual reality market thanks to its role in the China (Fujian) VR Industrial Base. 

Overall, NetDragon is a great bet for investors looking to profit on emerging technologies and online trends in China.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alex Perry doesn't own shares in any companies mentioned.