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China's game developers face challenges despite licensing restart

Authorities expected to continue strict scrutiny of content as growth slows

Boys play Tencent's "Honor of Kings" game: Software sales growth fell sharply in China this year as the government suspended approvals of new titles in March.   © Reuters

HONG KONG -- Chinese game companies' struggles are far from over despite Friday's jump in gaming share prices, following Beijing's move to resume approvals for new titles.

Feng Shixin, a senior official with a Chinese government watchdog, told participants at an industry conference on Friday that the first batch of approvals for games had been completed, according to an online video.

"We are working on the release of new licenses," Feng said. "Given the large number of new titles in the pipeline, it might take some time," he said.

While Feng didn't give a clear timeline, his remarks lifted the market. Shares of Hong Kong-listed Tencent Holdings jumped about 5%, closing at 317.8 Hong Kong dollars on Friday, while Nasdaq-listed NetEase's rose nearly 6% in premarket trading. Tencent and NetEase are the two largest game software companies in China.

The State Administration of Radio and Television, which monitors entertainment content, has licensed no new games since late March, due to restructuring at the organization. The freeze on new approvals has dealt a blow to Chinese gaming companies. In August, industry leader Tencent reported its first quarterly profit fall in 13 years. Industrywide, sales of games in China rose 5.3% on the year in 2018 to 214.4 billion yuan ($31 billion), according to a report published Friday by Beijing-based research company CNG and the country's official gaming association. That was down sharply from last year's 23% growth. 

"This is clearly exciting news for China's gaming industry," a Tencent spokesperson was quoted as saying by Tencent Tech, the news arm of the Shenzhen-based conglomerate. "We're confident that after the publishing license approval, we will [be able to] provide more compliant, high-quality cultural works to society and the public," the spokesperson said.

But some analysts say the share rally could be short-lived, as there are persistent challenges facing the industry.

"The license resumption definitely cannot end the gaming industry's struggle," said Kern Zhang, an analyst with App Annie, a market researcher specializing in online games. China's gaming sector has already matured, slowing revenue growth and sharpening competition among game developers, Zhang said.

This year, the number of Chinese gamers rose a modest 7.3% to 626 million, according to the CNG report. Although that was an improvement over the 3.1% rise in 2017, it continued a trend of sluggishness that began after 2015, the last year that the industry saw double-digit annual growth.

In addition, Beijing's tough scrutiny of game titles is expected to continue next year, posing another challenge, said Cui Chenyu, an analyst with IHS Markit's Shanghai office.

"Restarting license approval does not mean that Chinese regulators will ease up on gaming control, " Cui said. "In fact, we believe Beijing will further regulate the content of video games. That, in turn, will drive up gaming companies' production costs."

Earlier this year Tencent was forced to pull from its WeGame platform "Monster Hunter: World," a popular action role-playing game developed by Japanese studio Capcom, just five days after its launch for what the company called "content provided by game developers that did not comply with regulations."

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