Shares of Tencent Holdings continued to slump on Thursday as investors showed their disappointment with the unexpected profit drop at the world's largest gaming company, but its competitors felt limited impact from its troubles.
Until its shares began to slide earlier this year, Tencent had the highest market capitalization of any Chinese company. Its first quarterly profit decline in 13 years, reported after the market closed on Wednesday, saw its market value cut by 93.24 billion Hong Kong dollars in the following session, as its shares fell 2.9% to HK$326.20.
Tencent's latest bout of troubles began Monday when Chinese regulators forced the Shenzhen-based company to remove "Monster Hunter: World," a popular role-playing computer game it had licensed from Japan's Capcom, from its online platform. Tencent said it was told the game "did not comply with regulations."
Tencent's difficulties with Monster Hunter: World comes as growth in the Chinese gaming market, the world's largest by revenue and users, slows amid regulatory pressure and competition for attention from short-form video apps. The State Administration of Radio and Television has not licensed any new games since late March. Gaming revenues grew only 5% in the first half of 2018, the first single-digit rate increase since 2009, according to Beijing-based research company CNG.
Due to Tencent's large market cap, its decline weighed heavily on indexes including Hong Kong's Hang Seng and MSCI Emerging Markets. Hong Kong's benchmark slipped 0.6% on Thursday morning while the MSCI dropped 1.8%.
Shares of a dozen companies listed in New York, Hong Kong and Seoul backed by Tencent also fell following the earnings disappointment, with South Korean gaming company Netmarble sinking 6.1%. Contagion from Tencent however was limited among other gaming shares.
While Capcom fell 3.8% and DeNA slipped 0.2% in Tokyo, Nintendo rose 0.7%. In Hong Kong, IGG and Forgame Holdings each gained 0.7% while Razer dipped 1.2%, Netdragon Websoft Holdings declined 3.6% and Boyaa Interactive International lost 5.1%.
"IGG's business is more globalized" than Tencent's, said Kern Zhang, an analyst with App Annie, a gaming-focused market research company. "Given rising concerns over a slowdown in China, investors will certainly favor companies operating in overseas markets."
Market watchers are divided on how long Tencent's troubles may last.
"Tencent's business has already reached its peak unless there is a breakthrough in online advertisements or the financial sector," said Francis Lun, an analyst with GEO Securities in Hong Kong. "Tencent is no longer a high-growth stock and the share price will fall to HK$200."
Others, who see the regulatory issues in China as more related to an ongoing reorganization of government agencies and functions than to content concerns, expect Tencent to get a lift from the approval of new games already in the pipeline such as "PUBG Mobile."
"This should help remove the concern that the suspension of game reviews was aimed at cracking down on the online gaming industry," Nomura analysts said in a note on Thursday, reaffirming their "buy" rating. The bank has a 12-month target price of HK$449 for Tencent.
Daiwa Capital Markets, which also has a "buy" on Tencent, said "near-term sentiment could be challenging as its games business outlook for [the second half of 2018] lacks visibility pending a firm timetable for the resumption of game licensing" while confirming its own long-term positive outlook. "We consider the disruption to the game business to be temporary," the analysts said in a new note. "The business remains structurally intact, in our view,"
Additional reporting by Mitsuru Obe and Akihide Anzai in Tokyo and Sunny Tse in Hong Kong