China & Tencent – 3rd Quarter September 2021
The change in Chinese regulatory policies can be seen as China’s way of re-affirming control over their market, as they essentially play ‘regulation catch-up’ after a period of significant growth in their technology sector. This has been a sustained period during which technology companies have experienced a relatively large degree of freedom.
The recent regulations seem to be centred around regulating new industries and aligning the regulatory environment with China’s stated 5-year plan. The Chinese government wants people to have more children, however, a major deterrent to this is the cost of raising those children. In addition to conventional schooling, further online tutoring has become a concern for the Chinese government, as it views conventional education as a public good. The significant additional cost of private tutoring has placed a further burden on parents, an unintended consequence so far as the authorities are concerned.
Addressing this, China introduced regulations which made after-school EdTech (education technology) platforms run themselves as non-profit organisations, effectively commercially destroying this sector overnight.
Investor are concerned that China’s new regulation including its amended gaming sector regulations will have a similar devastating impact on other sectors of the market. Naturally this has resulted in increased market jitters.
One of the regulations introduced curbs the amount of time the youth are permitted to spend gaming. From a Tencent perspective, this has caused uncertainty regarding their future profitability, as a large proportion of their total revenue was historically resultant from gaming.
After discussion with our asset managers, GTC believes that the impact of this regulation will likely be relatively minor given that less than 3% of Tencent’s gamers are under the age of 16. Furthermore, after recent diversification efforts by Tencent, they have materially reduced their reliance on gaming revenue, now amounting to only some 30% of total revenues. Of this amount, 25% is derived from their international gaming base which is not subject to all of these Chinese regulatory limitations.
