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A Gaming Ethics Panel is Welcome News for China's TCEHY, NTES

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China’s freeze on video gaming approval is expected to thaw as regulators recently appointed an online video games ethics committee. The move will provide a sigh of relief not only to video game giants like Tencent (TCEHY - Free Report) and NetEase (NTES - Free Report) but also to several smaller developers.

Per Reuters, which cited a report from state media Xinhua, the committee has reviewed 20 titles, out of which nine were rejected and the remaining need changes. The review pace is particularly encouraging as it is likely to help video game developers launch titles by the first half of 2019 instead of the earlier projection of mid-2019.

It is also being speculated that the approval process will start again by the end of this year, helping companies cash in on the upcoming Lunar New Year, China’s most celebrated season.

Held-Up Approval Hurts Game Developers

China is the world’s largest video game market in terms of users (527 million) and revenues. However, in the first half of 2018, revenues increased 5% to 105 billion yuan ($15 billion). This was the slowest growth rate since 2009, primarily due to the halted approval process, saturated market and intensifying competition from short video apps like Douyin and Kuaishou.

Notably, the State Administration of Radio and Television, which is in charge of monitoring games and other entertainment content, stopped giving licenses to new games from Mar 28. The halt in approval process resulted in an estimated revenue loss of almost $1.4 billion till October-end, according to SuperData Research, quoted by The Wall Street Journal.

Some market observers believe that the halt in the approval process was a deliberate attempt by the government to hurt the video game industry’s growth rate. The stalled approval process as well as stringent regulations is expected to help the government tighten control over Internet as well as online content.

Confirming some of these speculations, in August, the Chinese Education Ministry announced plans to limit the number of online games and the amount of time kids spend playing on electronic devices. The ministry cited the measures as part of government’s effort to reduce eye-related problems among kids and adolescents.

The stalled approval process and stringent regulations have negatively impacted gaming companies like Tencent, NetEase and Bilibili (BILI - Free Report) . A number of Japanese game makers like Capcom, Nexon and Konami (KNMCY - Free Report) were also hurt due to their ties with Tencent and NetEase.

Although not directly impacted, U.S.-based game giant Activision Blizzard (ATVI - Free Report) , which has collaborations with Tencent and NetEase, also suffered this year.

Year-to-Date Price Performance

 


Tencent Most Hurt Among Chinese Game Developers

Apart from the smaller developers, the caught up approval process and stringent regulations have dealt the biggest blow to Tencent. The company along with NetEase is among the biggest game distributors in China.

Per Reuters, Tencent has lost more than $200 billion in market value since its January peak. The company shut down its popular Everyday Texas Hold’em poker game and also pulled down Monster Hunter: World from its WeGame platform amid increasing regulatory crackdown.

Per Bloomberg, Tencent is yet to receive full approval to introduce desktop versions for two of the world’s hottest games — PlayerUnknown’s Battlegrounds (PUBG) and Fortnite. It is also not allowed to monetize the mobile version of PUBG.

Currently, Tencent has a Zacks Rank #5 (Strong Sell), while NetEase has a Zacks Rank #4 (Sell).

Meanwhile, Bilibili and Activision are better-ranked stocks with a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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