U.S. Markets closed

China’s Game of Bans: 3 Gaming Stocks in Focus

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·5 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • NETTF
  • NTES
  • BILI
  • BLBLF
  • TCEHY
  • TCTZF

The growing ease of access to technology and devices for children often leads to heavy use of screens by children. The pandemic-led lockdowns last year added to the problem by forcing children to stay at home, out of fear of infection. With limited access to outdoor play, children all over the world have resorted to spending more time on video games.

Research published by by the Child and Adolescent Psychiatry and Mental Health Journal, in December of last year, found that addiction to video games possibly has detrimental impacts on young minds. These impacts include weak memory and attention span, poor cognitive abilities, and declining academic performance.

China Gets into Supernanny’s Shoes, Limits “Screen Time”

Notably, China is cracking its whip to improve the quality of life for children. Recently, the Chinese state media referred to online gaming as “opium for the mind," comparing it with drug addiction.

On Monday, August 30, regulators in Beijing placed a limit on the amount of time spent on video gaming among minors, to 3 hours per week. More specifically, video games can only be played between 8 p.m. and 9 p.m. on Fridays, weekends, and public holidays.

Talk of the government’s concern regarding the growing idleness among Chinese children has been brewing for some time. However, this is not the first time that China is pulling in the reins on the problem of binge-gaming among children. In 2019, regulators had limited video gaming among teens to 1.5 hours a day.

According to an article by a Chinese state-run publication—Economic Information Daily—the online binge-gaming problem had led to near-sightedness and poor academic performance in more than 50% of China’s children in 2020. This highlights the gravity of the issue.

Although we can almost hear the deep sigh of relief from parents in China after the curb, we can already cut the tension with a knife in the gaming industry. Stocks of Chinese gaming companies listed in the U.S. exchanges were thrown into a roller coaster ride after the announcement yesterday.

Can NetEase be at Ease?

The sharpest bump was witnessed by NetEase (NTES), a Chinese internet technology company that develops applications, services, and other technologies primarily for the gaming industry. The company had its fair share of a big run in 2020 and this year-to-date. However, the stock fell up to 8.8% during yesterday’s trading session, then rebalancing itself to close 3.4% lower.

NetEase is taking steps to protect young players, including the introduction of real-name registrations required to play games. More importantly, according to Morgan Stanley, minor gamers make up only a low-single-digit percent of NetEase’s gaming revenues. Hence, the curb in gaming hours should not meaningfully impact the company’s top-line.

Wall Street analysts aren’t too concerned as well, as reflected in the Strong Buy consensus rating based on 5 Buys, and an average NetEase price target of $134, suggesting a 49.5% upside.

My Two Cents on Tencent

China’s tech giant Tencent (TCEHY) addresses the various demands of Internet users for communication, information, entertainment, e-commerce, and others. Gaming constitutes a significant 31% of its vast business (as reported in the second quarter of 2021). The announcement of new gaming rules sent a wave of panic among investors yesterday, and the stock fell by as much as 3.3% during the day, eventually closing 1.1% lower.

However, Tencent investors need not worry, as the gaming revenue contribution from gamers under the age of 16 in China was only 2.6% of the total, last quarter. Moreover, Morgan Stanley says that minor gamers contribute approximately 6% of Tencent’s gaming revenues.

Moreover, in its last earnings call, the company announced its own efforts to curb game time and in-game purchases for minors in China. “For Honour of Kings and Peacekeeper Elite, we reduced Minors' daily game time limit to 1 hour on non-statutory holidays and to 2 hours on statutory holidays, versus regulatory requirement of 1.5 hours and 3 hours respectively. We also prevented in-game spending by players aged under 12. These measures will be rolled out in all of our games gradually. We are also cracking down on Minors misusing adult accounts, and transactions of adult accounts on third-party platforms,” noted the management.

Wall Street analysts seem to be cautiously optimistic about Tencent, with a Moderate Buy consensus rating, based on 2 Buys and 1 Sell. The average Tencent price target of $90 implies 54.4% upside potential from current levels.

Bilibili Banks on Other Segments

Investor sentiment for Bilibili (BILI) had already shaken on August 19, when it announced its second-quarter 2021 non-GAAP net loss of $0.35 per share, a widening since last year. To add to its woes, the Chinese regulatory crackdown on minors' gaming had its stock tumbling 1.6% at the end of yesterday’s trading session. In the first half of 2021, Bilibili generated 29% of its revenues from mobile gaming, highlighting its significant dependence on this segment.

Nonetheless, the robust growth and outlook of Bilibili's advertising and e-commerce businesses are highly capable of offsetting this downside. Moreover, the company is quite popular among China's Gen Z users, especially ACG (Animation, Comics, and Games) content enthusiasts. Moreover, Bilibili enjoys significant investments from Tencent, Alibaba (BABA), and Sony (SONY), which is a major positive.

Wall Street analysts are betting on Bilibili with a Strong Buy consensus rating, based on 8 Buys. The average Bilibili price target of $114.19 implies 54% upside potential from current levels.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of Tipranks or its affiliates, and should be considered for informational purposes only. Tipranks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. Tipranks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by Tipranks or its affiliates. Past performance is not indicative of future results, prices or performance.