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China’s video gaming rules knock shares in gaming companies

China's video gaming

Beijing said the new rules were necessary to stop growing addiction to what it once described as spiritual opium

China’s new rules prohibiting under-18s from playing video games for more than three hours a week knocked shares in Tencent Holdings Ltd and other gaming companies.

Beijing said the new rules were necessary to stop growing addiction to what it once described as “spiritual opium”. The People’s Daily, the official newspaper of the ruling Communist Party, said in an article on Monday after the rules were announced that the government had to be “ruthless”.

It’s indisputable that indulging in online games affects normal study life and the physical and mental health of teens, the article said. Destroying a teenager will destroy a family.

The hit to gaming stocks was relatively measured with analysts saying children in general did not provide much revenue for gaming companies, although they noted that the implications for the long-term growth of the industry were much more severe.

The root of the problem here is not the immediate revenue impact, said Mio Kato, an analyst who publishes on SmartKarma. The problem is that this move destroys the entire habit-forming nature of playing games at an early age.

Shares in Tencent dropped 3.6% on Tuesday. The stock has lost nearly 5% since the state media article that described gaming as spiritual opium was published on Aug 3.

Jefferies analysts said on Monday they expect to see about a 3% impact to Tencent’s earnings from the new rules, assuming gaming contributes about 60% of its total revenue.

NetEase shed 3.4% in overnight trade with its Hong Kong shares down by a similar amount on Tuesday.

Krafton Inc, which earns fees by providing services for a similar game to its blockbuster PUBG to Tencent in China, declined 3.4%.

Nexon and Koei Tecmo, which both have exposure to the Chinese market, shed 4.8% and 3.7% respectively.

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