NetEase Inc. is on the verge of reaching its highest stock value in over four years, driven by increased consumer spending from younger generations and other favorable conditions for Chinese gaming companies.

The Hong Kong-listed stock, known for popular games like Eggy Party, is currently within 3% of its 2021 record. It has emerged as one of the top-performing stocks this year across indexes tracking Chinese tech and global gaming firms.

Several factors are contributing to the success of Chinese game developers. Younger consumers are increasingly purchasing affordable digital entertainment in response to a slowing economy. additionally, the industry is benefiting from a more supportive regulatory environment, reduced competition, and the appeal of gaming stocks as a safe investment amid international trade tensions and restrictions on chip exports.

Investors are also drawn to the relatively low valuation of these stocks. NetEase and its main competitor, Tencent Holdings Ltd., are trading at substantially lower price-to-earnings ratios compared to companies like Nintendo Co. and Take-Two Interactive Software Inc.

“The resilience of video games is a result of savvy Chinese consumers shifting spending to cheaper services that offer emotional support.”

NetEase shares have jumped 45% this year, while Tencent’s have increased by 22%, supported by strong performance from established game titles. NetEase reported record player engagement for its seven-year-old game Identity V, and World of Warcraft has seen renewed interest as its return to China last year, facilitated by NetEase. Tencent reported record revenue for its games Honor of Kings and CrossFire Mobile in the first quarter.

Newer games are also contributing to the sector’s growth. NetEase’s role-playing game Where Winds Meet, launched its mobile version in January, and Tencent’s first-person shooter Delta Force quickly became a hit after its September release, maintaining a top-five ranking among free games on Apple Inc.’s app store in China.

Competition between NetEase and Tencent has decreased since their direct rivalry in the party-game category over a year ago. This contrasts with the intense price wars occurring in other sectors of China’s tech industry, such as food delivery and electric vehicles.

There are indications of increased regulatory support for China’s gaming industry, valued at over $40 billion, as well as a more positive stance towards the broader technology sector following previous regulatory actions. This year, authorities have approved 654 domestic and imported games, a 15% increase compared to the same period last year, according to data compiled by Bloomberg.

“There is some comfort with the regulatory body, that what they have put in place is good for now and is effective,” said Elias Erickson, a fund manager at ninety One Plc who owns NetEase and Tencent shares. “We’ve seen some attenuation to the volatility and uncertainty around game approvals.”

Celia Qiu, a senior investment analyst at Mirae Asset Global investments Co. in Hong Kong, noted that the notable valuation gap between Chinese gaming stocks and their global counterparts suggests potential for growth, especially given the promising revenue and earnings outlook for Chinese gaming companies in 2025.

Looking ahead, updates to well-known game franchises are expected to be crucial for capturing consumer spending. Upcoming releases include Tencent’s Honor of Kings: World and NetEase’s Destiny: Rising, both anticipated later this year.

“Evergreen games have stronger user loyalty,” said Jialong Shi, an analyst at Nomura International HK Ltd. “Games are one of the few affordable areas of online entertainment for many young people due to the freemium model, which makes the industry defensive to macro slowdown.”