Tencent: tighter controls on in-game spending threatens earnings

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Christmas time is a peak season for gaming companies. People gifting and playing games over the holidays add a big year-end boost to sales. But in China, the sector is looking much less festive this year. 

Shares in Tencent fell 14 per cent on Friday after regulators published new draft regulations to tighten control of the gaming sector. Beijing, which has long expressed concerns over the public’s gaming addiction, has kept the gaming industry in check through crackdowns that included temporary suspensions of new releases. 

It now plans to discourage high spending within online games and ban the use of rewards to encourage gamers to log on regularly, according to the National Press and Publication Administration.

Friday’s sell-off is not an overreaction. A decline in in-game spending has the potential to cause far more damage to earnings than Beijing’s previous measures, such as limiting playing times for minors. 

Most mobile games are free to download and play. But gamers buy in-game items such as skins and clothing for their characters as they progress through the game. This is a hugely lucrative business, with mobile gamers spending more than $1.6bn per week globally, according to mobile analytics company Data.ai. Here, Tencent dominates. Its fantasy battle game Honour of Kings is the world’s top-grossing mobile title.

Worryingly, previous crackdowns on the gaming sector have been drawn-out affairs. They included an eight-month freeze on new game approvals, investigations for cyber security violations and fines for illegal material on messaging platforms.

Shares of Tencent are down 35 per cent from a January high They trade at 15 times forward earnings, half the levels from two years ago. Investors had hoped China’s tech sector crackdown had come to an end in July when probes ended with fines. But the latest moves are a reminder that companies still have to play by Beijing’s rules.