Analyst Note| Chelsey Tam |
Several departments of the Chinese government have held talks with Tencent, NetEase platforms for gaming accounts rental and sales and gaming livestreaming platforms as per Caixin. To us, most notable during the discussions are new requirements around antimarket concentration, strengthening controls of in-app purchases, and game designs that induce addiction. Faced with growing regulatory uncertainty in domestic gaming, we expect Chinese gaming companies to speed up international market expansion, which is supported by the government, and could be a long-term margin driver because overseas app stores take a cut of 30% versus non-Apple app stores’ 50% in China. We maintain the fair value estimate of Tencent, NetEase and CMGE as we don’t factor in a substantial threat in the base-case scenario. This is another demonstration by the government of its ability to enforce stringent regulations on Internet companies, and our conversations with investors indicate they are unlikely to accumulate Chinese Internet stocks yet until the regulatory overhang is removed.