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Media & Entertainment

Japanese game stocks shrug off China clampdown

Shares in software makers jump ahead of Tokyo Game Show

Gaming stocks are on the rise ahead of the Tokyo Game Show, scheduled at the end of September, as investors anticipate news on upcoming titles. (File photo by Yuki Kohara) 

TOKYO -- Shares in gaming companies are gaining traction as investors snap up the beaten down sector, in spite of growing pressure in China, the world's biggest gaming market, to limit the amount of playtime for underage kids.

Game stocks in the Tokyo market have picked up steam with software developers like Koei Tecmo Holdings, the company behind hit franchise "Romance of the Three Kingdoms," soaring 23% in the last month and "eFootball" creator Konami Holdings up 13% in the same period.

Shares in Capcom, the Japanese game maker of the popular "Resident Evil" series, has also climbed 11%, outperforming the benchmark Topix index's 7% rise.

The sector has been buoyed in part by anticipation of the Tokyo Game Show, scheduled to take place at the end of September. The exhibition is one of the world's key gaming conventions where hundreds of companies showcase their latest titles and have historically fueled stock trading.

Game stocks were also looking undervalued after a brief sell-off caused by China's tightening grip on the industry. China announced at the end of August that under-18 gamers can only play online for three hours a week between 8 p.m. and 9 p.m. on Fridays, Saturdays, Sundays and public holidays, leading to a slide in the shares of Tencent Holdings and other gaming companies.

However, many analysts are brushing off the idea that China's regulatory clampdown will affect Japanese game makers and their profits.

"Most Japanese companies have not released mobile games targeting Chinese players," said Morgan Stanley MUFG Securities analyst Masahiro Ono.

In China, multiplayer online battle arena games are widely popular while in Japan, puzzle games are the dominant genre. "The two have a different culture around mobile gaming, which is why you don't really see Japanese mobile game publishers entering China," Ono said.

Koei Tecmo licenses out its popular franchise to a Chinese game company but players are mostly above the age of 20 and will unlikely be impacted by the tighter regulatory scrutiny. The company's stock price has surged in recent days, hitting a record high this week.

Similarly, shares in DeNA, which offers a Chinese mobile game based on the popular Japanese comic series "Slam Dunk," have climbed 6% since last week's China-led sell-off.

China's vast $45 billion gaming industry has constantly faced regulatory scrutiny, deterring many Japanese companies from making a full-scale entry into the market. In addition to Beijing's stricter stance, the Chinese market is also overcrowded with domestic players. Politically stable markets like the U.S. and Europe, as well as Southeast Asia's big growth potential have been more attractive for Japanese game makers in recent years.

Meanwhile, shares in China's Tencent and NetEase have come under pressure. The two game companies were summoned by regulators this week and ordered to stop focusing on online gaming profits, which sent their stock prices plummeting 8% and 11% respectively on Thursday.

South Korean-Japanese video game developer Nexon, which saw its stock price momentarily recover from the selloff, fell nearly 5% again on Thursday. China generates roughly 30% of the company's revenue.

Shares in South Korean game maker Krafton, developer of the worldwide hit "PlayerUnknown's Battlegrounds," have also put in a less than stellar performance. They are down roughly 3% from their closing price on August 10, when they made their market debut. China is Krafton's biggest market.

Gaming companies experienced an impressive jump in revenue last year as stay-at-home orders due to the pandemic pushed gamers online. In turn, the industry gained from renewed investor interest.

However, the unprecedented demand has set the bar high for many companies this year.

Console makers like Sony Group and Nintendo are battling a global semiconductor shortage. Both companies' stocks have seen more modest gains in the last month.

Compared to the beginning of the year, Nintendo's stock price remains in negative territory. Its shares have declined 12% since the maker of the hugely popular "Animal Crossing: New Horizons" game said in May that it expects a 29% drop in net profit for the year ending March 2022.

Video game makers, on the other hand, do not have to worry about securing chips.

As a result, Kenji Fukuyama, an analyst at UBS Securities in Tokyo, notes that stocks of software makers are more attractive for investors now, rather than hardware makers like Sony and Nintendo. "The chip crunch could continue into next year but video game makers are not affected and have the chance of increasing profit by releasing new titles on existing platforms," Fukuyama said.

SMBC Nikko Securities' senior analyst Eiji Maeda also pointed out that the software companies' price-to-earnings ratios have fallen to around 20 times forward earnings from 30 last year. "Lower valuations have made it easier for investors to buy with the view that earnings will pick up again next fiscal year," Maeda said.

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