Just when investors thought the risks of buying Alibaba (BABA) declined, Beijing released draft guidelines that targeted excess gaming and spending habits. Tencent (TCEHY) lost around 12% before closing down 9.84% last Friday. NetEase (NTES) dropped 24.6% before closing down 16% to $87.64.
Do these new measures fundamentally change the online gaming business model? Vigo Zhang, Tencent Games vice president, told CNBC that the measures clarify the authorities’ support for the online gaming industry.
China started the technology crackdown in late 2020. Markets largely ignored the risks, sending NetEase on a long-term uptrend from $50 to as high as $133 on Jan. 2021. The large intraday drop is evidence that investors need to price in the unpredictability of the Chinese government. NTES stock trades at a low 15 times P/E discount for a reason. Markets are pricing in the risks of the punitive rules against the online gaming market in the country.
Increasing regulations are a warning flag for investors.
The draft guidelines will have an impact on NetEase’s revenue. Still, the firm has dozens of games. The guidelines do not apply to all of them. Tencent, thanks to its wide range of investments, is less risky for investors. Although TCEHY stock looks like a buying event, investors should wait for the government to release its final guidelines.
