Shares of Chinese gaming companies Tencent (HK:0700) and NetEase (HK:9999) rose in early trade this morning on the news of the ouster of a key Chinese gaming official, Feng Shixin. Both Tencent and NetEase shares are up 1.5% on the Hong Kong Stock Exchange at the time of writing.
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Tencent is one of China’s largest internet companies, offering major services, including communication and social networking, online PC and mobile games, content, email, app store, mobile security, mobile browser, cloud services, and financial technology.
Meanwhile, NetEase is a relatively smaller player with offerings spanning online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce.
Why Does the Official’s Ouster Matter?
On December 22, Shixin announced a set of new regulations for gaming companies that wiped out roughly HK$80 billion of the market cap of Tencent and NetEase. The official proposed a cap on consumer spending on video games and the use of rewards to lure gamers. The news triggered fresh fears that the Chinese regulators were tightening their belt on the gaming sector. Tencent shares lost 12% on the day of the announcement, while NetEase shares crashed 25%. A similar crackdown on the Chinese tech sector in 2021 led to a major decline in the share price of technology players.
Shixin was the head of the publishing unit of the Communist Party’s Publicity Department. The department runs the National Press and Publication Administration (NPPA), which is responsible for regulating China’s gaming industry. His ouster signals that the NPPA will not impose the proposed regulations in the short term, not at least the same curbs that shook the market. Shixin’s ouster has sent a relief signal to investors that the crackdown may not occur, thus pushing up shares of Chinese gaming companies.
China’s post-pandemic recovery has been rather dull, and authorities are worried about further damage to the capital market. Also, foreign investors have pulled out their money from Chinese companies owing to the stricter scrutiny of the tech sector. Likewise, tighter regulations could weigh on the world’s largest gaming market.
As per data provider Statista, revenues from China’s video game market are expected to reach US$94.49 billion in 2024, demonstrating the importance of the sector toward economic growth. Authorities are trying to salvage the situation by sending positive signs that there is no crackdown on the cards.
Is Tencent a Buy, Sell, or Hold?
Despite the noise, 0700 stock commands a Strong Buy consensus rating on TipRanks. This is based on 11 Buys and two Hold ratings received in the past three months. The Tencent Holdings Ltd share price target of HK$435.12 implies 46.7% upside potential from current levels. Tencent shares have lost 8.9% in the past year.
Is NetEase a Good Stock to Buy?
Analysts are surely confident about NetEase’s stock trajectory. With six unanimous Buys, 9999 stock has a Strong Buy consensus rating on TipRanks. The NetEase Inc. share price forecast of HK$216.17 implies a nearly 48% upside potential from current levels. NetEase shares have gained 25.4% in the past year.
