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  1. Home
  2. / Markets
  3. / China

Tencent Poised for Stock Price Gains After Key Government Approval

Tencent, one of the two largest Chinese video game makers, is set to rise after winning a license from the Chinese government to roll out new games.
By ALEX FREW MCMILLAN
Jan 25, 2019 | 01:30 PM EST
Stocks quotes in this article: TCEHY, NTES, BABA, FB

Tencent Holdings (TCEHY) has been held ransom by the Chinese government, which froze the approval of new video games in China for nine months. Its shares were hit with a savage selloff well before tech in general tumbled. But the freeze has thawed.

So too has Tencent's share price. Its recent run-up echoes the start of its 2017 tear, when it doubled and then some, at its peak posting a 155% gain. Watch, in other words, for greater gains again.

Tencent and its rival NetEase (NTES) , the two largest Chinese video game makers, have both just won their first licenses for new games after that government-enforced hiatus. Both companies had missed out on the first three rounds of game approvals since the authorities relaxed their stance and began giving new titles the thumbs up in December.

Tencent and NetEase rely on video games as their largest revenue generators. So it is with huge relief the company and investors greet clearance for Tencent's self-developed games, Wood Joints and Hand Fan, while NetEase can now market its "massively multiplayer online role-playing game," War Spring and Autumn.

The two Tencent games are based on Chinese culture, and functional: players get to design furniture, or Chinese fans. It's more exciting for Tencent that the massively multiplayer game Perfect World Mobile was also approved, Jefferies analyst Karen Chan said in an industry note.

The martial arts online game was developed by Perfect World, and literally made that company's name a decade ago. This new mobile version is exclusively licensed to Tencent. It also offers great potential for monetization.

The other key point is the government is likely to intensify the game-granting action after its sudden cessation of licensing. It looks like 2,000 to 3,000 games will now be approved this year, with a raft of new releases likely after the Lunar New Year, which falls on Feb. 5, 2019.

There's a backlog of 7,000 to 8,000 games from all makers awaiting. Tencent should see meaningful feedthrough in results in the second part of this year. The key risk to Tencent now would be if its games start showing a short lifecycle, Chan noted, while for NetEase it's the pace of licensing and any macro slowdown in China that might mess things up, earnings-wise.

Tencent's WeChat social-messaging app (the "Chinese WhatsApp") is ubiquitous in China, used not just for chat but also for, well, basically everything, particularly mobile payments and ordering goods. The company, which competitors say copies anything worth copying, has expanded into cloud storage, movie making, digital payments, artificial intelligence and self-driving cars.

But it's gaming that gave it its start, and gaming that matters most. As it became clear Chinese authorities were not approving new games, Tencent's stock slid 44.3% between March and October last year.

Investors are once again seeing cents in Tencent. The game maker's shares have rallied since their Oct. 30 low, and after Friday's 4.1% gain have risen another 32.2%. But in terms of market cap, Tencent remains around three-quarters of its previous size.

At US$417 billion in market capitalization, Shenzhen-based Tencent is once again Asia's biggest company. It has overtaken Hangzhou-based Alibaba Group Holding (BABA) , at US$404 billion in market value. Both are just behind the US$419 billion value of Facebook (FB) , ranking the trio Nos. 6, 7 and 8 among the world's biggest corporations.

Alibaba and Tencent both posted massive gains in 2017, and at that time the two swapped size back and forth. But the regulatory hassles only hit Tencent, with the Chinese authorities worried about the violent content in some games, and more so about the immense amount of time many minors are spending playing games in China.

Tencent is now requiring age verification for its blockbuster Honour of Kings. It also says it will start using facial recognition to detect minors using its games. Another major reason why China stopped approving games had nothing to do with content and was entirely procedural: there was a reshuffling of departments and their scope.

Tencent has run ahead of the tech rout in the West by one quarter, and began its rally one quarter earlier, too. It seems very likely that Alibaba's shares will now stage a rebound, with the FANG stocks showing renewed resilience in the new year.

Alibaba appears to have turned a corner with its Dec. 20 low of US$135 per share, and has risen 15.4% to US$156. If it and Tencent continue their upward progress, they're very valuable parts of a portfolio.

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TAGS: Markets | China

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