Why The Market Is Dead Wrong On China's Gaming 'Crackdown'

Summary

• The latest controls on Chinese gaming have been largely misunderstood.
• The perceived addiction problem in China stems from a generational clash.
• But Beijing's need for social stability as well as the massive secular tailwinds should drive the market.
• The approval process could resume as soon as end-September, yet analysts have not modeled a resumption.
• The recent dip is an opportunity to profit off "millennial sin" through Tencent and NetEase.

"Some kids are so hooked on these games. They think taking a restroom break will affect their performance at these games. So, they wear a diaper. That's why we call it electronic heroin."

To the uninitiated, Asia's affinity with online games might seem a bit strange. The severity of China's online gaming addiction problem even stranger.

Here's some stats to blow your mind - Tencent's (OTCPK:TCEHY) top grossing game last year ("Honor of Kings") grossed over $3 billion, out-earning Avatar by > $200 million, never mind Avengers' measly $2 billion (beaten by a cool $1 billion+). And that's just 2017, mind you.

Rank	Title	Studio	Worldwide Gross	Year
	Honor of Kings	Timi L1 Studio (Tencent)	>$3,000.00	2017
1	Avatar	Fox	$2,788.00	2009
2	Titanic	Paramount	$2,187.50	1997
3	Star Wars: The Force Awakens	Buena Vista	$2,068.20	2015
4	Avengers: Infinity War	Buena Vista	$2,046.20	2018
5	Jurassic World	Universal	$1,671.70	2015

Click to enlarge

(Source: Tencent, CLSA)

No wonder then that China's Ministry of Education has now included gaming controls as a key step in fighting myopia among Chinese minors. In its notice, the Ministry outlined that the General Administration of Press and Publication (GAPP), i.e. China's gaming regulator, should 1) limit the number of new online video games and 2) take measures to limit the amount of time young people spend playing games.

All this hoopla around Chinese gaming might seem mighty weird until you watch this video:

"Electronic Heroin"

The "electronic heroin" reference has been around for a while but I first caught wind of it when I read this piece, which offers another fascinating insight into the dark side of online gaming and how the Chinese are dealing with it.

Strangely, the de facto parental move seems to be - 1) trick child into leaving computer by promising a "holiday", 2) deliver child

Analyst’s Disclosure:I am/we are long TCEHY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.