E-sports refers to a form of competition facilitated by online technologies, enabling video gamers to compete against each. Similar to professional sporting leagues, online gaming has evolved into a sophisticated spectator sport, organised into competitive leagues and tournaments.

“E-sports is becoming an important part of game publishers’ business strategy and will continue to gain mainstream traction due to growing viewership, sponsorship and investments from professional sports organisations,” said Marcus Yang, an analyst from Macquarie.

China’s booming e-sports industry can trace its roots back to titles such as “StartCraft” and “League of Legends” as well as “Dota” and “CrossFire”.

“The expanding game base is critical for e-sports monetisation,” Yang said.

During the past 10 years China’s internet population has grown by about five times, driven by rising numbers of mobile internet users. About 95 per cent of the Chinese population own an internet compatible mobile phone according to 2016 figures, up from 24 per cent in 2007.

The rising popularity of the industry has also helped to draw in big money, providing a lucrative prize pool to attract professional gamers, said Yang.

Last year professional e-sport teams in China competed for US$42 million in prize money, or about 45 per cent of the US$93 million prize pool globally.

Another key driver for e-sports development is authority recognition. Since allowing e-sports to be broadcast on TV since 2013, Chinese authorities have progressively eased restrictions on the sector. E-sports events will be included in the upcoming Asian Games, due to be held in Hangzhou in 2022, and an eventual spot in the Olympics has been muted.

The industry is on track to reach 74 billion yuan (US$11.2 billion) in 2019, up from 3.6 billion yuan in 2016, data from Analysys showed.

According to iResearch, the mobile market will surpass computer e-sports by the end of the year.

“Tencent’s ‘Honor of Kings’ maintained strong performance in August and its grossing reached a record high,” according to a report by Morgan Stanley.

Morgan Stanley has an overweight rating on Tencent owing to “ sustained leadership of ‘Honor of Kings’ and a strong pipeline in the second half this year”.

Morgan Stanley has an equal weight rating on NetEase. The major operators Tencent and NetEase made up 70 per cent of China’s mobile games market in 2016.

Looking ahead, Yang expects another wave of innovation ushered in virtual reality and artificial reality.

“What is wanting now is a breakthrough in hardware, [which remains expensive] and then consumer experience,” said Yang.

Consumers are very likely to have their first artificial reality experience by a mobile phone or tablet.

“Artificial reality will be commonly applied in online games, and has big growth potential,” said Pei Pei, an analyst from Sinolink Securities. “I believe half of China’s smartphones could serve as artificial reality terminals by the 2019.”

Meanwhile, virtual reality is poised to spark further innovation, given its ability to provide an unrivalled consumer experience.

Analysts expect China will soon begin to leverage its e-sport muscle on the global market.

“Going abroad is a certainty for China’s online games [when the growth moderates] especially for the small players,” said Patrick Choi, an analyst from Essence International.

Overseas revenue for China’s online games increased 36.2 per cent to US$7.2 billion in 2016.