China’s internet giant Tencent Holdings Ltd. (HK:0700) is making headlines today following two key developments. Firstly, Tencent’s Riot Games unit is slashing its workforce by 11% or 530 jobs. Tencent follows several other video gaming companies that have recently cut jobs. Secondly, Tencent shares spiked over 6% this morning after China’s regulator removed new stricter rules on video game operators from its website.
Tencent Holdings is one of China’s most valuable tech companies, offering social networking, music, web portals, e-commerce, mobile games, and internet services. It is one of the world’s largest video game companies. 0700 shares have lost over 33% in the past year.
Riot’s Workforce Reduction Plans
Tencent became a majority owner of Los Angeles-based Riot Games in 2011. In an email yesterday, Riot’s CEO, Dylan Jadeja, informed employees that the company’s costs had become “unsustainable” due to multiple projects that did not perform well. Hence, the video game maker is forced to cut jobs, especially those roles that are not directly involved in game development.
Jadeja mentioned that the company will focus on live gaming titles such as League of Legends, Valorant, Teamfight Tactics, and Wild Rift.
The global gaming industry has witnessed a steady deceleration in demand post-pandemic. The COVID-19-induced demand for in-house entertainment, such as video gaming, faded over time as people started venturing out. Moreover, inflationary pressures and sluggish economic growth have impacted consumer spending.
Jadeja noted that Riot Games “more than doubled in headcount” over recent years. He acknowledged that the company lacked proper focus and had too many things under its wings. Further, he noted that Riot Forge will discontinue new game development and cut features from Legends of Runeterra due to its sluggish acceptance.
China’s Relaxed Rules for Gaming Industry
As per a Reuters report, China’s National Press and Publication Administration’s (NPPA) website has removed the proposed rules uploaded in December targeting video gaming companies. The NPPA set new rules to reduce the spending limit on online games and prohibit rewarding video gamers for playing more.
The proposed rules saw mass opposition from video game companies as shareholders fled the stocks, thinking stricter rules were here to stay. This also forced the NPPA to fire a key Chinese gaming official, Feng Shixin, who was responsible for these rules.
The report suggests that NPPA had sought feedback on the proposed rules, the deadline for which ended yesterday, January 22. Hence, speculations are rife that either the NPPA is completely doing away with the draft rules or it might announce more relaxed rules. Markets reacted positively to the report, pushing up shares of video game companies, including Tencent and NetEase (HK:9999). However, only time will tell if the speculations about relaxed rules are true or whether regulators will come back with tighter ones.
Are Tencent Shares a Good Buy?
With 11 Buys and two Hold ratings, 0700 stock has a Strong Buy consensus rating on TipRanks. The Tencent Holdings share price forecast of HK$428.83 implies 63.6% upside potential from current levels.
