Gaming Stocks Plunge After Beijing Unleashes Surprise Crackdown

Video game and software stocks in China plummeted on Friday following the Communist Party's unexpected announcement of new gaming restrictions, reigniting fears that Beijing is resuming its crackdown on the internet sector. 

Bloomberg reports the country's top gaming regulator published draft rules designed to curb gaming addiction among users by limiting total money spent and online time. These so-called 'caps' on each player restrict the amount of time, ban rewards for frequent usage, and even prohibit content that violates national security. 

An intense selloff swept across China's largest gaming companies as concerns mount that the new rules would dent earnings. 

Tencent shares in Hong Kong plunged 12%, the most since October 2008, while NetEase crashed 25%. Bloomberg data showed 37 Interactive Entertainment and Perfect World slid by the daily 10% limit. Gaming stocks in Europe, South Africa, South Korea, and Japan also fell. 

"The government gaming curb measures will hurt gaming companies' earnings," said Yang Junxuan, a fund manager at Shanghai Junniu Private Fund Management Co.

Junxuan said, "But the more important concern is people are worrying that more measures targeting the sector will come, just like what Beijing did to the education sector in the past."

Chinese authorities have aimed to tackle gaming addiction, attributing rising levels of near-sightedness in children to online entertainment. 

The crackdown, with little warning, reminds us of the days when the Communist Party waged war against the country's tech sector several years ago for amassing too much power and expanding recklessly.

For more color on how the rules will impact gaming stocks, Bloomberg has compiled comments from top Wall Street analysts: 

Daisy Li, fund manager at EFG Asset Management HK

• "With the rules, gaming players behavior could change and the companies daily active users could take a hit"

• Its hard to quantify the impact at this stage but the draft rules raise concerns over the gaming companies' monetization prospects 

• The big share price drop in NetEase and Tencent may also reflect that the two names are consensus long

Xin-Yao Ng, an investment director for Asian equities at abrdn

• "Previous clampdowns were more on minors, which didn't matter as much for monetization, but this new clause seems broad-based across all users"

• The draft includes an especially concerning clause that would limit monetization of hard core games, suggest things like removing common rewards like daily login, first purchase, and tiered rewards for the amount of spending, etc. There also seems to a suggestion of capping per-person spending

• The rules, if implemented, will reduce significantly monetization flexibility for the developers

Yang Junxuan, a fund manager at Shanghai Junniu Private Fund Management Co.

• The gaming curb measures, including a ban on rewards for frequent log-ins, are likely to hurt gaming companies' earnings

• More importantly, investors have concerns that there will be additional measures targeting the sector, as happened when Beijing cracked down on the education sector

Willer Chen, senior analyst at Forsyth Barr Asia Ltd.

• The comprehensive and stringent draft rules would have a sizable impact on the gaming companies' earnings outlook.

• "It caught people off guard, right before the holiday and hitting sentiment hard"

•  "It feels disheartening as well for this to happen after a year that is already so difficult for the market"

Steven Leung, an executive director at UOB Kay Hian

• This reminds investors of the nightmare a few years ago, when the government tried to regulate mobile games' play times

• "Tencent is the very few names in which people still have some interest, and with these new rules, investors may just leave the market totally, because the policy risk is too high"

Rajeev De Mello, a global macro fund manager at GAMA Asset Management

• "In a way it is a fitting end for a year that has severely disappointed China bulls like me"

• "The first thought that crossed my mind when I saw the gaming headlines was that regulatory changes can still hit us anytime. I did think that we had reached a pause in tightening regulations"

Mike Leung, investment manager at Wocom Securities

• "Strict regulation will inevitably hinder the long-term development of the online gaming industry, raising doubts about whether the government is contemplating a new round of regulatory direction."

And Lightstream Research analyst Mio Kato warned: "This is the beginning of the end for the current mobile gaming business model."