This morning, the Chinese administration issued new draft rules for online games aiming to limit spending and tackle game addiction. While the document lacks details, the new rules would introduce spending limits (prohibition of high-priced transactions, recharge limits…) and prohibit certain user engagement methods (rewards for daily log-in and first-time/multiple purchases).
We believe that the revenue headwind should not be material given that the Chinese gaming industry has learned over the years how to operate amid various regulatory crackdowns and measures aimed at protecting children (2018 and 2021-22) and to find new ways to attract and retain users. Noteworthy, there is no talk right now about license suspension for new games, contrary to the previous crackdowns.
Accordingly, the stock price reactions this morning in Hong Kong of Tencent, NetEase and Kingsoft among others appear disproportionate. That said, this new round of regulation, that comes after this summer’s guidelines for preventing minors from spending too much time on their smartphones (with the introduction of daily use time limits depending on users’ age), is likely to cast a shadow again on the whole Chinese Tech sector and remind investors that Chinese equities’ low valuations can be justified by a total lack of visibility on local policies, not to mention weak macro.
As far as we are concerned, we largely stay away from Chinese Tech equities as we consider that low valuations are not a sufficient argument in light of the above-mentioned risks. We have a limited c.10% Chinese exposure in our Gaming portfolio (that could be reduced in coming weeks) and close to 0% exposure in all our other portfolios.