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Were China's Gaming Leaders Snubbed as Approvals Resume?

By Danny Vena – Updated Apr 18, 2019 at 9:40PM

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There's a reason to be patient.

After a nearly nine-month hiatus, Chinese regulators have resumed the approval process for new video game titles. In late December, the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) released a list of newly approved titles -- 80 in all -- the first such approvals since March of last year. An additional 84 games were given the green light this week. This brings an end to the freeze that has paralyzed China's once vibrant video game industry and left investors fearing the worst.

While this is good news for gaming companies in China, the country's biggest video game publishers, Tencent Holdings (TCEHY -1.22%) and NetEase (NTES -2.55%), failed to make the cut, with no games approved in the first two batches. Let's take a look back at what led to the shakeup and where it leaves investors today.

A young man wearing headphones playing a video game.

China has resumed video game approvals. Image source: Getty Images.

A perfect storm

Last year was a tough one for the gaming industry in China, as a number of factors -- each more challenging than the last -- ground progress to a halt. The Chinese yuan fell against the dollar to levels not seen in nearly a decade, and the Shanghai Composite Index fell to multiyear lows as 2018 drew to a close, taken down by a slowing economy and the ongoing trade war between Washington, D.C., and Beijing.

The biggest contributor to the industry woes, however, was a freeze on video game approvals by the Chinese government. The crackdown began early last year over growing concerns regarding the effects of violent content, myopia, and gaming addiction on children. The moratorium on new titles resulted in the slowest revenue growth for the industry in a decade and weighed heavily on both Tencent and NetEase, whose stocks fell 24% and 30%, respectively, in 2018.

The changing regulatory landscape

China shuffled the government departments responsible for reviewing video games early last year, while also making changes to the approval process. Previously, two departments shared the responsibility: The National Radio and Television Administration and the Ministry of Culture and Tourism. Initial reports indicated that licenses hadn't been issued for months and the process of registering games was becoming more difficult, a result of a bureaucratic shakeup.

Later reports indicated that SAPPRFT was formed in April and charged with oversight of the approval process. This agency is overseen by the publicity department of the Communist Party, signaling the increasing scrutiny of the Chinese government on the video game industry. Regulatory officials sought to "implement controls on the total number of online video games, control the number of new video games operated online, explore an age-appropriate reminder system in line with China's national conditions, and take measures to limit the amount of time minors [spend on games]." 

In early December, a newly formed committee -- the Online Games Ethics Committee -- began the process of evaluating new video game titles for approval. In a sign of tougher times ahead, the oversight group rejected nine games outright, while asking video game publishers of the remaining 11 titles to make changes to the games. 

Three young people smiling and looking at each other's smartphones.

Image source: Getty Images.

What this means to investors

Investors in Tencent and NetEase shouldn't panic as local media reports indicate that the license approvals are being granted in the order they were received, so titles for China's two largest gaming companies likely are still be waiting to be reviewed. This process will take some time, as it's estimated that there are at least 7,000 games in the backlog. Given the size of the two batches of approvals granted thus far it isn't much of a surprise that the gaming behemoths weren't among the first to be approved. 

It seems to be only a matter of time before Tencent and NetEase make the cut.

Check out the latest Tencent Holdings and NetEase earnings call transcripts.

Danny Vena owns shares of Tencent Holdings. The Motley Fool owns shares of and recommends NetEase and Tencent Holdings. The Motley Fool has a disclosure policy.

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