Tencent (TCEHY US), the biggest company in China and one of the biggest companies in the world, has recently been getting hit from right and left in form of regulatory actions in China (we warned about the awful trend long ago).
The company is mostly known for the WeChat app (which is almost universally used in China with over 1.bn users). While the WeChat app is important, majority (over 70%) of its revenues comes from its gaming VAS division according the company’s filings.
It is within this gaming division that the Chinese Authorities have put forward various regulatory proposals that can have severe negative effect for Tencent. The first is the freezing of gaming approval for various games as noted below by Bloomberg
China’s regulators have frozen approval of game licenses amid a government shake-up, according to people familiar with the matter, throwing the world’s biggest gaming market into disarray.
Tencent noted this on its earnings call out 15th of August;
“At this point in time, we don’t have visibility on when exactly the official approval will start yet,” said President Martin Lau on a conference call with investors. “”We do believe it’s not a matter of whether these games will be approved for monetization, but a matter of when.”
Tencent’s stock fell an additional 5% on 30th of August when news came out that China’s education ministry is proposing additional new laws to combat increasing eye problems amongst children;
Ministry of Education of the People’s Republic of China released a note on its plan to curb the increasing rise of eye problems among the country’s youth population. It noted — in a Chinese-language document — that myopia was becoming a “very severe” issue that could lead to big problems for the country in the future.
In its recommendations, the Chinese education ministry suggested controlling the number of approvals for new online video games, implementing an age ratings system for games, as well as restrictions to the amount of time minors are allowed to play games online. Source: CNBC
Tencent (TCEHY US) has lost over $160bn (almost 30%) in market value since beginning of this year, and it appears there is no end in sight on when things will become clearer.
Tencent (TECHY US) is the biggest component of the MSCI Emerging Markets Index with almost 5% of its weighting.
Source: MSCI
Furthermore, Naspers (NPSNY US) which has 2% of the weighting of the Index, has of its value from its holding in Tencent. The corresponding ETF to the index is EEM US.
There are various ways to play both a view on Tencent and the overall EM space via the EEM US ETF.
Another way to play the regulatory changes in gaming China is to trade the China Internet ETF, KWEB US. Tencent is over 10% of this ETF. In addition Netease (NTES US), another major Chinese company, makes up over 7% of the China Internet Index, along with the more well known Alibaba (9.5% and Baidu 8.7%).
As can be seen from the above chart the KWEB US ETF has declined over 25% since start of the year and continues trading in a perfect downtrend.
As a conclusion, Tencent (TECHY US), EEM US and KWEB US represent various ways you can express a view on the Emerging Market space as well as the gaming regulatory play in China.
Trading options on EEM US is a pleasant experience as liquidity is great. Note the volumes traded on Friday in only front month options.
Source: charts by Bloomberg
