Back in the Game

NetEase_Tencent

We have always viewed the negative impact of these regulations as purely short term...

Temporary freeze has been thawed

The long wait for China’s two largest gaming giants has come to an end. After nearly a year’s delay, Tencent and NetEase have been allowed to release new titles to domestic audiences.

The recent green light has been welcomed by investors after what had become something of an overhang for the country’s booming games industry.

We have always viewed the negative impact of these regulations as purely short term and, in the long term, we believe greater regulation should lead to an industry with higher standards of governance.

This was never just about the gamers

The regulations to limit screen time for minors and the content they access is part of a wider move to protect the wellbeing of China’s children. At the other end of the spectrum comes stricter oversight of after-school tuition (as children often face rigorous competition to get into the top universities).

Secondly, an unintended consequence of the regulations has been that Chinese firms have been penalised at the expense of foreign operators, such as US online gaming platform Steam. Although we don’t believe China will want to roll back on regulation, we are also confident it will not want to penalise its homegrown companies in the long term.

Good for the long-term

On a recent research trip, we spoke to Tencent and its major shareholder Naspers and it was clear increased regulation has not come as a surprise to the industry.

In China, the internet is now impacting the offline industry as much as the online, from financial services to retailing. The government wants to have a formal understanding of the issues, recognising the requirement for new approaches.

NetEast+Tencent

Importantly, companies agree that regulation is ultimately good for their long-term growth. Tencent has no plans to change its long-term strategy, but is aware that with increased focus on regulation, it needs to play its part. The company is already helping to regulate screen time, including reviewing its registration process.

From our point of view, regulation is often beneficial from a long-term perspective, leading to better standards of governance in individual companies and resulting in more sustainable investments.


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