Tencent Holdings Ltd (0700)

[CY09]

Most games are designed where the end state is about 10% of players spend, while 90% do not spend and are free to play players. These 10% are financing the entire game development and maintenance. If one recalls when young, there is a game called runescape. F2P has no adverts but with limited skills and access. P2P had membership and it was a flat fee. It was a model that served well but Jagex (the parent) did not earn much.

The P2P landscape then evolved with game developers having tiered P2P membership fees with the highest membership fee offering level boost and items which made game playing easier. Both Tencent and Blizzard went on this route. China finds this too cannabalising on the weakness of its populace. If china is capping on how much the 10% of spenders can spend on the game, it caps how much Tencent can earn from domestic games. The domestic games market contributes to 20% of Tencent revenue and is part of the VAS segment which is the highest gross profit margin segment in the Tencent Conglomerate. Tencent Music is part of the VAS segment and its GPM is below that of VAS, this suggests the gaming sector has a high GPM that is north of 60%

Investors should be aware of this observation and watch how Tencent's P&L will be impacted if the gaming regulation takes place

[Bibi]

I have also made some silly decision regarding my China stock. From averaging down my Ping An shares to the tune of 6 digit paper losses to gaining twice what i have lost when China reopens. Yet i didnt sell becos i think longer term China will do well. Now back to 6 digit paper losses.

I shifted half of Ping An to Tencent when there was rumours of gov requesting Ping An to take over Country Garden, though Ping An denies it, but i believe the rumours are true. Perhaps Ping An ultimately did reject the gov request. After that rumour, Ping An price continues downhill. Who will dare to buy? Who knows gov will request Ping An to take over what other companies?

Tencent was pretty stable during that period after I switched over. Until last fri i think thats it for me. I liquidated all and realized the losses. main reason is the draft recommendation of a cap on how much a player can spend on a game title.

No doubt that was only a draft and that rule might not go thru. But i believe its just like gov fighting alcohol and smoking addiction. They will keep increasing taxes till they think its pp have stopped the addiction. So when perhaps the economy becomes stronger, i believe that the gov will come in again with this cap rule for the gaming industry.

And whats more theres the news of Xi telling Biden straight that China will take over Taiwan face to face during their Nov meeting. Xi has also mentioned in news i read they cant keep pushing away reunification of taiwan again and again. So whether peaceful or forceful reunification, its just a matter of time. I believe it will be forceful reunification but not now when its economy is still weak.

[Choon]

I have also made some silly decision regarding my China stock. From averaging down my Ping An shares to the tune of 6 digit paper losses to gaining twice what i have lost when China reopens. Yet i didnt sell becos i think longer term China will do well. Now back to 6 digit paper losses.

I shifted half of Ping An to Tencent when there was rumours of gov requesting Ping An to take over Country Garden, though Ping An denies it, but i believe the rumours are true. Perhaps Ping An ultimately did reject the gov request. After that rumour, Ping An price continues downhill. Who will dare to buy? Who knows gov will request Ping An to take over what other companies?

Tencent was pretty stable during that period after I switched over. Until last fri i think thats it for me. I liquidated all and realized the losses. main reason is the draft recommendation of a cap on how much a player can spend on a game title.

No doubt that was only a draft and that rule might not go thru. But i believe its just like gov fighting alcohol and smoking addiction. They will keep increasing taxes till they think its pp have stopped the addiction. So when perhaps the economy becomes stronger, i believe that the gov will come in again with this cap rule for the gaming industry.

And whats more theres the news of Xi telling Biden straight that China will take over Taiwan face to face during their Nov meeting. Xi has also mentioned in news i read they cant keep pushing away reunification of taiwan again and again. So whether peaceful or forceful reunification, its just a matter of time. I believe it will be forceful reunification but not now when its economy is still weak.

"The govt now wants to set a cap on how much $ each player can spend within a title"

This proposed regulation is so rigid. I will be surprised if this is implemented. Philosophically, how is this different from capping how much a person can spend on alcohol or prostitution or chocolate or fast food and to be specific, how much a person can spend on a specific brand of beer or a specific brothel.

[Choon]

Surely a good sign of undervalued country specific market! Haha.

It is getting easier to shoot in the barrel!

I find below from Duan Yongping take on gaming draft rules to be interesting (translated using WeTranslate):
The nature of games is that people need somewhere to spend their time, and online games are the cheapest place to have fun and spend time. Nothing can stop people from playing games, otherwise what you let everyone do? But the quality of the games are many, playing mahjong is one of them. Net net, standardization to prevent certain people eager for quick success and instant benefit & profiteering is pretty good actually. In the long run, this kind of regulation is definitely good for good quality gaming companies.

Direct link in Chinese:
https://xueqiu.com/1247347556/272166720

Ksir, 

大道无形我有型 is the account of Duan Yongping?

[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.

[Bibi]

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.

What do u think may be the reason Warren Buffet divested its TSMC stake and not investing in China co since many r so cheap now?

[donmihaihai]

Surely a good sign of undervalued country specific market! Haha.

It is getting easier to shoot in the barrel!

I find below from Duan Yongping take on gaming draft rules to be interesting (translated using WeTranslate):
The nature of games is that people need somewhere to spend their time, and online games are the cheapest place to have fun and spend time. Nothing can stop people from playing games, otherwise what you let everyone do? But the quality of the games are many, playing mahjong is one of them. Net net, standardization to prevent certain people eager for quick success and instant benefit & profiteering is pretty good actually. In the long run, this kind of regulation is definitely good for good quality gaming companies.

Direct link in Chinese:
https://xueqiu.com/1247347556/272166720

A free to play gamer ride on paying gamer. A gamer who spends money easily is certainly better than a controlled payer. The cost of development and maintaining a game should be relatively fixed based on the game and number of players. The kick come when players spend more or crazy gamers. 

It is like a cat and mouse game. If this route to monetize the game is blocked, I will bet developers will come out with new methods. Perhaps the reality show of Chineses playing hide and seek with their government on the internet will repeat here. Fun to watch I bet. 

But well, I know nothing about this subject.

[Wildreamz]

While I'm not a fan of F2P + P2W, loot boxes, and all the other tricks that game developers use to monetize their games. I feel that this policies (like many other policies in the past by the Chinese government) to be too hard-handed and addressing the symptoms rather than the cause (治标不治本).

Also, this move (like the other policies in the last 2 years), calls into question what's next? If they can put a hard cap on how much gamers can spend per title, are they going to put a hard cap on how much Live Streamers can make per user per month?

Good luck to those that continue to put their trust on the current administration.

[ksir]

Surely a good sign of undervalued country specific market! Haha.

It is getting easier to shoot in the barrel!

I find below from Duan Yongping take on gaming draft rules to be interesting (translated using WeTranslate):
The nature of games is that people need somewhere to spend their time, and online games are the cheapest place to have fun and spend time. Nothing can stop people from playing games, otherwise what you let everyone do? But the quality of the games are many, playing mahjong is one of them. Net net, standardization to prevent certain people eager for quick success and instant benefit & profiteering is pretty good actually. In the long run, this kind of regulation is definitely good for good quality gaming companies.

Direct link in Chinese:
https://xueqiu.com/1247347556/272166720

Ksir, 

大道无形我有型 is the account of Duan Yongping?

Yup, that is right.
His comments are usually direct, blunt & almost always looking further than others.

The regulations (if ever being implemented as is), will likely kill off the existing small & medium gaming companies (the agency heads going to roll before that ever happen).
Releasing such rules during such depressed time and on friday (why not hold a few more hours and waited for the market to close, for market to digest over the weekend??), it is either "someone" trying to profit from the market panic or just the pure show of stupidity. I bet could be a combination of both.

But anyway, the saga did throw me opportunities to pick up more tencent below 300 and netease at 110. For that, kudos man!

Imho, the rules need to kill off half of the gaming companies before it brings down NetEase and almost all gaming companies before Tencent!

[Choon]

Surely a good sign of undervalued country specific market! Haha.

It is getting easier to shoot in the barrel!

I find below from Duan Yongping take on gaming draft rules to be interesting (translated using WeTranslate):
The nature of games is that people need somewhere to spend their time, and online games are the cheapest place to have fun and spend time. Nothing can stop people from playing games, otherwise what you let everyone do? But the quality of the games are many, playing mahjong is one of them. Net net, standardization to prevent certain people eager for quick success and instant benefit & profiteering is pretty good actually. In the long run, this kind of regulation is definitely good for good quality gaming companies.

Direct link in Chinese:
https://xueqiu.com/1247347556/272166720

Ksir, 

大道无形我有型 is the account of Duan Yongping?

Yup, that is right.
His comments are usually direct, blunt & almost always looking further than others.

The regulations (if ever being implemented as is), will likely kill off the existing small & medium gaming companies (the agency heads going to roll before that ever happen).
Releasing such rules during such depressed time and on friday (why not hold a few more hours and waited for the market to close, for market to digest over the weekend??), it is either "someone" trying to profit from the market panic or just the pure show of stupidity. I bet could be a combination of both.

But anyway, the saga did throw me opportunities to pick up more tencent below 300 and netease at 110. For that, kudos man!

Imho, the rules need to kill off half of the gaming companies before it brings down NetEase and almost all gaming companies before Tencent!

Thank you. I find his comments frank and sharp too. Will keep an eye on his postings.

In your investment thesis for Tencent, 

- how much of it is based on a 'value-play'  / that the price now is not commensurate to its current strength and quality; and

- how much of it is based on a 'growth-story' / that earnings could be substantially higher 5, 10, 15 years from now?

I ask because I struggle to see what future growth there can be given its dominance.