China’s crackdown on video games has hammered one of its most valuable companies. And it’s unclear when the situation will improve.
Shares of Tencent (TCEHY), a huge technology and entertainment conglomerate, are down about 40% from their peak in January. Its epic stock plunge has wiped out more than $230 billion in market value.
The decline has been enough to push Tencent out of the world’s 10 biggest companies. It’s now No. 11, according to data from Refinitiv. As recently as March, it ranked fifth, eclipsing corporate giants like Berkshire Hathaway (BRKB), Facebook (FB) and JPMorgan Chase (JPM).
China is the world’s biggest gaming market, and Tencent is the world’s biggest gaming company. But investors are worried that Chinese authorities will extend into next year a freeze on approving licenses that allow companies to make money from new online games.
Tencent shares in Hong Kong have fallen more than 2% so far this week. It has also suffered recently from the broader sell-off in global tech stocks.
But the uncertainty over when the Chinese government will start approving new game licenses again remains a key problem for Tencent shares, analysts at investment bank Daiwa Capital Markets said in a research note Monday. They expect the company to report a 20% drop in revenue from its mobile gaming business for the third quarter of 2018.
There are other concerns hanging over Tencent, which owns WeChat, China’s most popular messaging platform.
China’s Education Ministry announced in August that it would “control” how many new games come online and look into setting up a system to remind users about which games are appropriate for users of different ages. It said the measures are part of an effort to reduce nearsightedness in children and adolescents.
Tencent reported a rare decline in profit in August, blaming the drop mainly on regulators not approving licenses for new games.
But if approvals resume soon, that could prompt a turnaround.
The Daiwa analysts, who recommend buying the stock at its current levels, said they believe the company has strong long-term growth prospects. They highlighted the vast number of people who use Tencent’s products (WeChat has more than 1 billion users) and the company’s “superior” ability to make money out of them.
Tencent did not respond to a request for comment.
Sherisse Pham contributed to this report.