Netease crashes 23% as China flags more online gaming curbs; Seen as an 'overeaction'

Shares of Chinese gaming giant Tencent (HK:0700) and smaller peer Netease fell sharply on Friday after authorities unveiled more regulations aimed at curbing player spending on online gaming.

Tencent Holdings (OTC:TCEHY) Ltd (0700)- the world's largest video game developer- closed 12.4% lower in Hong Kong trade, while NetEase (NASDAQ:NTES) Inc (9999) slumped 24.6%. The two were among the worst performers on the Hang Seng index, which shed 1.7%.

US-listed Netease shares fell more than 23% in pre-market trade.

The National Press and Publication Administration (NPPA)- the entity responsible for licensing and regulating video games in China- said it will impose spending limits on online games and will require operators to clearly present them within their games.

The agency also said it will ban online game operators from including inductive rewards, which it alleged misguided consumers into spending more time and money in games.

The proposed rules come as the latest round of crackdowns against online gaming by Chinese authorities, who have repeatedly cited concerns over videogame and internet addiction in the countrys youth.

But the new curbs also clash with earlier signals from China that it will ease up on restrictions against its internet giants, in a bid to spur economic growth in the country.

Chinas videogame industry saw some signs of recovery this year after an over year-long crackdown that began in 2021. The NPPA had frozen the approval of new game releases for eight months, but had again begun approving new games this year.

Tencent clocked some growth in revenues from gaming in the third quarter, although a bulk of this came from the international market. Revenue from Value Added Services- which includes microtransactions in videogames, only increased 4% from the prior quarter, and 10% from the prior year.

Netease- whose revenue comes almost entirely from online games- saw a 11.6% year-on-year increase in revenue in the third quarter.

Revenue growth in both firms has remained largely subdued this year amid sluggish economic trends in China. A slowdown in discretionary spending kept spending on online games largely muted.

China slid further into disinflationary territory in November, as a post-COVID economic rebound failed to materialize this year. The trend has raised concerns over weak consumer spending in the country, while Beijing has remained largely conservative in rolling out more economic support.

“We believe the share price reaction on gaming names today could prove over-reacted, though we understand any proposals or actions by regulators/govts may send strong signals given the weak sentiment and challenging macro,” analysts at Citi said.

“In addition, since it‘s closer to the year-end with many investors hiding in gaming names, especially NetEase for the defensive nature given softening macro environment, the unexpected release of the draft is likely to further affect investors’ confidence in China internet stocks.”