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Last March, Chinese regulators halted all approvals of new video games on vague concerns about children's eyesight, gaming addiction, and violence in games. That ban was dire news for Tencent (NASDAQOTH: TCEHY), the largest game publisher in China and the world. Nearly a third of Tencent's revenues came from online games last quarter.
That's why Tencent investors breathed a sigh of relief when regulators restarted the approval process last December. Yet the two subsequent rounds of approvals, which cleared 257 new games for Chinese gamers, didn't include any Tencent games. Tencent's biggest gaming rival, NetEase (NASDAQ: NTES), was also left out in the cold.
Image source: Getty Images.
Should investors worry about this ongoing delay? Or is it merely a speed bump on the road toward the revival of Tencent's gaming business?
How the gaming freeze hurt Tencent
Tencent's gaming portfolio includes the e-sport favorite League of Legends, the mobile hits Clash of Clans and Honor of Kings (also known as Arena of Valor), and the popular kart racer QQ Speed. It also licenses Capcom's (NASDAQOTH: CCOEF) Monster Hunter World, Epic Games' Fortnite, and Bluehole's PUBG. Tencent owns major stakes in both Epic Games and Bluehole.
Regulators froze gaming approvals just as Tencent was rolling out Monster Hunter World, PUBG, and Fortnite to Chinese gamers to reduce its dependence on aging titles like Honor of Kings -- which remains the top mobile game in China.
The government abruptly forced Tencent to halt sales of Monster Hunter World for PC gamers over the summer and put the PC approvals of PUBG and Fortnite on ice. Tencent was also blocked from monetizing PUBG Mobile with loot boxes and micro-transactions. All those headwinds caused its gaming business to hit a brick wall over the past two quarters:
| Q3 2017 | Q4 2017 | Q1 2018 | Q2 2018 | Q3 2018 | |
|---|---|---|---|---|---|
| Revenues* | 26.8 billion | 24.4 billion | 28.8 billion | 25.2 billion | 25.8 billion |
| YOY growth | 48% | 32% | 26% | 6% | (4%) |
Tencent's online gaming revenues. Source: Quarterly reports. *RMB. YOY = year over year.
On the bright side, Tencent's 4% drop in gaming revenues topped expectations and it actually launched 10 mobile games that were approved prior to the freeze. That delayed-launch strategy boosted its mobile gaming revenues 7% annually, but that growth was completely offset by a 15% decline in its PC gaming revenues.
Tencent also stated that it still had 15 other pre-approved games in its pipeline, which indicates that it can still tread water as it waits for the long-awaited approvals of Monster Hunter World, PUBG, and Fortnite.