Tencent – Game off.

Tencent needs all its regulatory expertise.

• Tencent’s regulatory woes look set to continue for some time to come, meaning that the outlook for the next few quarters remains difficult.
• Tencent has now been forced to shut down its popular “Everyday Texas Hold’Em” game on September 25^th as the game is seen as too much like gambling for the regulator.
• Gambling is illegal in mainland China.
• It is also very likely that a whole load of other games that involve playing cards or even draughts and chess may also be affected in the coming months.
• Consequently, it looks like Tencent will be forced to remove or alter in a way that makes them less fun to play, many of the games that make up a large part of its revenue.
• The net result is that Tencent will be unlikely to be able to return to rapid growth for the immediate term as:
  • First, tough comparisons: Q3 17, Q4 17 and Q1 18 were all good quarters for Tencent where the business was firing on all cylinders.
  • Consequently, with regulatory issues impacting its business, the comparisons to these quarters on a YoY business will be difficult.
  • Hence, Tencent could easily end up reporting revenue declines on a YoY basis for three quarters to come.
  • Declining revenues will not enthuse the market and hence the share price is unlikely to recover for a while.
  • Second, Baidu: had similar issues in 2016 when a student died after receiving an experimental treatment he saw advertised on Baidu.
  • Admittedly, this was a much more serious regulatory problem than Tencent has and I do not think that Baidu is as adept as Tencent at dealing with these issues.
  • It took Baidu nearly 18 months to put these issues behind it.
  • I don’t think that it will take Tencent as long, but it is clear that this is not an issue that it will be able to quickly brush to one side.
• While this is bad for Tencent in the immediate term, increasing regulation will help it keep competition at bay in the long-term.
• This is because a Byzantine regulatory environment is forming where getting games approved will become almost as much of a skill as writing the games themselves.
• In this environment, it is the big companies that will end up winning.
• This is because only the big companies will be able to afford to have large compliance departments that can deal effectively with the regulator and ensure that their products come to market.
• This is particularly the case for Tencent which has proven to be adept at navigating its way through regulatory problems over the last few years.
• Hence, this is likely to be a short-term correction and I am looking for the right moment to buy back into Tencent.