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AGTech Pulling Games From Lucky Buy.  Implication For Tencent & Netease.

|Includes: AGTEF, Alibaba Group Holding Limited (BABA), NTES, TCEHY, WBAI

Summary

Alibaba-AGTech decided to replace existing games on Lucky Buy (LB).

Quantifying Lucky Buy (LB).

Looking ahead to Power Play and Guan-Dan Poker.

This is an aggressive tactical move but why?

Is Tencent in danger?

I confirmed that AGTech has taken down existing games in Lucky Buy and they are in the process of putting up new games on the platform. This move is voluntary, but one has to wonder why management is choosing such aggressive tactic.

Two weeks ago, a reporter from an obscure rag accused Alibaba of running an illegal gambling business by having casino games on Lucky Buy app.  This rag also made a ridiculous claim that people were losing millions which is impossible to do on LB.  Alibaba strongly dismissed this accusation, but AGTech decided to take down the games in question and modify them.  This week, management decided to replace all the games in Lucky Buy. 

Quantifying Lucky Buy

Lucky buy is currently the biggest contributor to the new Games & Entertainment (G&E) segment of AGTech.  G&E is also the fastest growing segment, so this development is a setback for sure and explains recent stock weakness.  But, Lucky Buy generated 5 million dollars of revenue in three month which isn't much.  

This is the fits and start, the bump on the road, twists, and turns, and pivots that all startup companies go through.  Lucky for AGTech, two of their biggest initiatives are about to go live.

Looking ahead to PayTM and Online Guan-Dan Poker

PayTM is India's biggest payment processing company that ANT Financial has a strategic stake.  AGTech has quickly set up 45%-55% JV to launch a mobile game app for PayTM customers.  In any market, distribution holds the key to success.  Game operators in India spend upwards of 40% of their revenue to attract new players and payment processing fees.  PayTM has over 200 million mobile phone using customers and run the biggest payment processing business in India.  Marketing mobile games to PayTM customers will be like "shooting fish in a barrel."  In addition to marketing their games, AGTech is engaged in partnership conversations with many big global third-party game makers to offer globally popular multi-player games to PayTM customers.  This is an opportunity to invest on the ground floor of Tencent of India.   What's more interesting is the fact that the PayTM business model is "Plug and Play." AGTech management is already in deep conversations to set up the same business with other payment processors that ANT Financial has a stake and or relationships.  

Online Guan-Dan Poker Tournament:  Poker is not a game but a sport.  Mind Sport to be exact. Which means it will not fall under the scrutiny of "Gambling".  Besides, Online Guan-Dan operating license was granted by the government.  There are over 150 million self-declared "avid Guan-Dan players."  There are numerous sites that offer consumers to play Guan-Dan but none of them offer "Play for Cash" like AGTech.  So, if you are going to play, why not play for a chance to win real cash vs. funny money?

PayTM and Guan Dan Poker Tournament is scheduled for an official launch in a couple of weeks.  My sense is the these two has plenty of room for upside surprise.

Why did AGTech decide to pull the games from Lucky Buy?  Implication for Tencent

John Sun and his team have always operated their business conservatively especially when dealing with the government. AGTech has demonstrated their ability to accurately read what Beijing is thinking and have managed to stay ahead of the curve.  So, what does it mean when they decide to pull all of their games in Lucky Buy for modification?  I did some digging.

The gaming companies started to use virtual currency (funny money) to get around the no gambling law in China. The gaming companies are not breaking the letter of the law, but the spirit of the law?  It's safe to say they pulverized it.  Gaming companies are laughing all the way to the bank while making jokes about screwing Beijing regulators.  I wonder how Beijing feels about this?  Some months back, Beijing expressed concerned about the length of time that young people spend playing mindless video games that are often violent.  They asked Tencent to lead the effort of educating and limiting the time China's youth is playing video games, but I'm not sure if Tencent did anything significant.

What if Beijing suspends ALL games that use virtual currency because they are breaking the spirit of "No Gambling" law in China?  If this announcement is made tomorrow, how much will Tencent stock fall?  What if Beijing decides to conduct an extensive audit while keeping the games suspended like the Lottery sector for over two years and start arresting executives for deceiving the government?  This is certainly within the realm of possibilities.  Afterall, this is China.  None of this is factored into Tencent and other Chinese gaming company's stock price.  

Disclosure: I am/we are long BABA, AGTEF.