Sunday, May 26

Tencent buybacks hit record as China watchdog roiled markets

Tencent Holdings Ltd. bought back a record HK$10 billion ($1.3 billion) of shares in December and has accelerated the pace even further into 2024 after China’s gaming regulator surprised investors with a raft of new regulations that triggered a broad tech selloff.

China’s most valuable company sharply boosted its buybacks as the shock announcement triggered a 12% plunge on Dec. 22. Tencent has since increased daily purchases to about HK$1 billion, compared with an average of HK$375 million a day last year prior to the sweeping gaming restrictions.

The controversial regulations, which encompass caps on in-game spending and a ban on rewards for frequent log-ins, revived fears that China was reverting to a 2021-style crackdown on the internet arena. While Beijing has since sought to contain market damage, reportedly sacking a top official who helped oversee the sector, Tencent remains about 4% below where it was before the new rules were proposed.

Some industry watchers argue that the watchdog’s intent was consistent with years-long efforts to police content and gaming. Tencent and rivals such as NetEase Inc. already labor under some of the world’s strictest constraints, from limits on playing time for minors to censorship.

Still, for many investors, who remain traumatized by a spate of abrupt rules and guidelines that crippled sectors from e-commerce to entertainment in 2021, the latest incident has only reinforced the notion that China’s policy unpredictability remains a big risk.

Tencent spokespeople didn’t immediately respond to email and text message queries from Bloomberg for this story.

What Bloomberg Intelligence Says

Confidence in Tencent and NetEase may recover further after China’s regulator approved 105 video-game titles in December, a 17-month high and above the 2023 monthly average of 80-90. Tencent had three titles approved, ending its recent drought, and NetEase got two. Their shares’ Dec. 22 crash was due to concern about potential tightening of rules for video games. We see this as incremental change in a sector that’s already highly regulated and think Tencent’s fundamental game outlook is largely unchanged. – Robert Lea, analyst

The latest gaming restrictions caught industry players and investors off guard on the final trading day before Christmas, exacerbating the fallout and triggering a selloff in gaming stocks worldwide.

The episode underscores the challenge facing President Xi Jinping as he looks to revive an economy struggling to arrest a slide in the property sector, while maintaining control of a vast and powerful tech sector. Tencent, the largest Chinese company by market value, is considered crucial to reviving the world’s No. 2 economy.

Tencent fell 0.7% before trimming losses on Thursday, while a Hang Seng gauge of Chinese tech shares lost 0.8%.

“If you look at the market, the valuation in the market for China internet stock is almost at historic lows,” Tencent President Martin Lau said on the company’s most recent earnings call. “At this point, buyback will be a more favorable means for our shareholders than other means.” – Bloomberg

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