Tencent Holdings Ltd (0700)

[Choon]

A more detailed description of the draft regulations can be found here:

https://www.chinalawtranslate.com/en/19889-2/
http://zw.china.com.cn/2023-12/22/conten...7953.shtml

The essence as I understand it is that gaming companies should not use tricks to encourage excessive spending by consumers. The most explicit/biggest impact to near-term earnings may be the regulation that games have to set a limit on how much gamers can top up their e-wallets for in-game spending. But even this, I think, will have to depend on how the limit is set and what level the limit is set at.

I feel that Chinese when unrestrained, tend to go to the extremes e.g. 内卷 in schools and workplaces, Evergrande has a musical/dance troupe!, the bicycles of various colours few years back, heavy subsidies of food delivery platforms, playing too much computer games, even the discounts/coins of e-commerce platforms to encourage spending.

So on balance, even as an investor of Tencent, I feel that these regulations are good for the long-term prospects and development of Tencent.

The draft regulations are not all negatives. There is one line that says that gaming companies are encouraged to foster international collaboration and through games, promote the soft-power of the Chinese culture, and that individuals/companies whom contribute to the healthy development of the gaming market will be commended. This shows that the Chinese government does not regard gaming as a whole to be negative. I think that the Chinese government also wants the gaming industry to grow but to grow in a positive way.

So I think for investors, we have to also consider if companies are 'exploiting' or 'gaming' the market too much and correspondingly, factor in a discount, for eventually, such extremes will swing back to a more normal state, either by government intervention or by other societal / competition forces. And I think this is different from saying that Chinese stocks are un-investible because the Chinese government cannot stand capitalism flourishing in China. I remember when Charlie Munger divested his Ali stake, the reason he stated was Ali is just another retailer and will face much competition pressure. It was for a economic/business reason that he divested Ali, not a political reason.

So another potential area of intervention by the Chinese government may be whether e-commerce platforms through their discounts have encouraged excessive and frivolous consumer spending. But it is not because the Chinese government wants to punish e-commerce platforms, just that once again, Chinese have went to the extremes.