GAMES: Tencent, NetEase Shunned as Game Approvals Resume

Bottom line: Tencent and NetEase will become long-term beneficiaries of a cleanup of China’s online game sector, despite their lack of new launches so far following the recent end of a 10-month freeze on approval of new titles.

No new approvals for Tencent, NetEase

China’s 10-month freeze on approval of new online games has official ended, but don’t tell that to industry leaders Tencent (HKEx: 700) and NetEase (Nasdaq: NTES). China’s gaming regulator has officially just published its latest list of newly approved game titles, which is its third since it resumed such approvals in late December. (English article)

As with the first two lists, observers are focusing more on who wasn’t represented rather than who was. And as with the first two lists, both Tencent and NetEase were absent once again. That raises the question of what the regulator may be trying to do, and whether this could have long-term ramifications for China’s two leading online game companies.

Based on the two companies’ share prices, investors don’t seem to be too worried just yet. Both stocks rose around 10 percent after the approvals resumed in late December, even though neither got any approvals on the first list. But both stocks have given back some of those gains since then, and it does appear that everyone is taking a bit of a wait-and-see stance. NetEase stock dipped 5 percent on Tuesday in New York after its name wasn’t included on the latest list, while Tencent’s was down by a more modest 1.2 percent midway through the Wednesday trading day.

The backstory here is that Beijing launched a major government overhaul last March that was unrelated to any of this. But as a result of that overhaul, which included the merging of several departments, approval of new titles ground to a halt from that time. It appears the late December resumption had less to do with any politics, and was more just a matter of the newly reorganized departments getting their act together to resume their work.

It’s also worth noting that during the freeze, the regulators were conducting a broader campaign to clean up “unhealthy” content in a wide array of media, from microblogs to gaming to the highly popular live-streaming video format. The gaming sector also got hit with a government declaration that the number of new titles approved each year would go down going forward, in an effort to focus on quality over quantity.

All of that brings us back to the present, and what might be going on with the repeated absence of Tencent and NetEase from the list of new approvals. I’ve heard quite a few interpretations, each with a slightly different slant.

Differing Views

One view says the regulator is deliberately avoiding the biggest names for now in a bid to focus on smaller companies whose existence may have been threatened by such a long approval freeze last year. Another says the games operated by NetEase and Tencent tend to be more complex than some of the simpler fare from their rivals, and thus they may require longer and more extensive reviews for approval.

The people I’ve talked to say the end game in all this, so to speak, seems to be a broader cleanup that will result in some much-needed consolidation and improvement of the quality of titles on the market. (English article) If that’s really the case, which seems quite plausible, it should bode well for Tencent, NetEase and the handful of other major operators.

That could be good news for both companies’ stocks going forward, after both experienced major sell-offs that saw them lose around a third of their value last year. Of course the big wild card in all this is the Chinese economy, which looks to be in increasingly precarious position these days. But if the economy suddenly stalls, we’re likely to see widespread negative effects over just about all industries, not just for gamers like Tencent and NetEase.

 

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