Tencent is restructuring amidst continued Chinese game industry woes

    
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we wanted to love you

Tencent is having a terrible, horrible, no good very bad year so far. Sure, its problems began when Monster Hunter World had to get unceremoniously moved backwards in the release schedule due to the Chinese government having issues with approving new games. But its problems have been compounding, not getting better, as the approval process remains stagnant and other corporate setbacks bring the game giant down to a net $190 billion loss.

That means it’s time for a corporate restructuring as Tencent tries to pull up from its freefall, focusing more heavily on technology development to keep up with its closest competing firm, Alibaba. The company even seems to have scaled back its planned global launch of WeGame, removing interviews with the director at this year’s Gamescom. Obviously, the firm is still enormous and in little danger of shutting down, but it’s clear that the troubles in the international marketplace have hit Tencent hard.

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Brother Maynard

a net $190 billion loss

Are you sure this is right? One fifth of Apple’s market cap as a net loss of a single company?

I’d probably double-check either the number of zeroes or the currency. Or both.

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Schmidt.Capela

Right now (i.e., after that loss described in the article) Tencent is about 40% the size of Apple, as measured by market cap. And it lost about a third of its value from its 52-weeks peak. So, yeah, both the number of zeros and the currency are right.

The competitor mentioned in the article, Alibaba — best known in the west for its online sales platform, kinda like a Chinese EBay — is roughly the same size (and incidentally much larger than EBay). China has some ridiculously large, and rich, companies, which is why you see so many foreign companies being acquired by Chinese companies.

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Brother Maynard

Yeah, I googled it later and saw that it was in fact the Tencent’s market value that dropped by 190 billion – and not a Tencent’s net loss, as this article suggests.

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Mr.McSleaz

China is about to roll out a Social Credit Scoring system that would make Orwell Blush.
All countries / Customers should Boycott China or you’ll be seeing this crap in your country soon.

P3lli
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P3lli

Time to invest bois.

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Armsbend

Don’t invest in Chinese stocks right now. Too risky.

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Sally Bowls

Of the gaming stocks that come to my mind first, Tencent is clearly performing the worst this year.

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Armsbend

Those prices are really outdated. ATVI for instance was at 83 today.

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Paragon Lost

EA looks pretty rough on that as well.

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Armsbend

Wall Street has not appreciated the direction of it’s fall lineup.

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rafael12104

The latest Battlefield is in deep trouble. Internet critics and financial analyst seem to agree that it will be a huge loss. Call of Duty will compound the problem.

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steel hunt

Giant Chinese corporations are backed by certain factions within the communist government. In other words, there is no way you can be as big as Tencent in China without certain political figure in Chinese government backing you up.

Policies like these are the result of political infighting within factions of Communist government for dominance.

When Chinese officials wants to remove some political figures due to faction differences, they often go for these giant companies first in order to stop the financial backings to that political group.

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Sim

Wonder if this has anything to do with Jack Ma’s announcement of retirement to focus on philanthropy.

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Stormwaltz

The impression I’m left with is that the Chinese government is trying to harm Tencent by preventing them from releasing any products on the domestic marketplace.

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Armsbend

You are neglecting to mention that the entire Chinese stock market is down roughly 25% since the trade war began. 25% is insane! The effects are negligible in the US but have been devastating in China.

As far as wars go – there is one country clearly winning at this point.

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Stormwaltz

I did a quick, casual Google. While it appears to be true that there’s a 25% loss, economists suggest looking at that number in isolation is misleading – because much of the Chinese economy is state-managed. The performance of their stock market isn’t as strong an indicator of overall health as the performance of the US stock market is.

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sarna2

Yeah, basically the “stock market” in China is not really a stock market as we imagine it in the US, and how it does has little bearing on the state of the economy.

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Schmidt.Capela

Actually, even if you take just the western countries where the stock market works closer to that of the US, it’s still not the whole story.

For starters, and as pointed before, it doesn’t reflect the performance of any unlisted company, such as privately owned companies, including every company that is too small to make an IPO, like most local business. Besides, it doesn’t even reflect how healthy those companies are or their long term viability, but instead mostly reflect how above or below projections they are going to remunerate their shareholders in the short term.

As an example, wage increases tend to send stock prices tumbling down, because large companies will have to spend more money with their employees and have less available to give to shareholders. The effect on small, local companies is the opposite, though, because those employees will have more money available and thus spend more, and local companies tend to capture this extra spending faster. Thus, the aggregate effect on the economy isn’t as bad as the stock price decline might paint, and could even be positive, particularly in the long term.

In the specific case of China, there’s also another factor you need to take into account: China has been trying to bring the economic growth down to a manageable level for a good while now. Much of that loss of value in the stock market is because China has been systematically reducing the amount of credit available to local companies in a deliberate attempt to slow down the economy. Even with that loss of value in the stock market and the escalating trade war China is on track to hit the government’s target for GDP growth, an impressive (though historically small for China) 6.5% growth.

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Stormwaltz

Fascinating – I hadn’t heard they were deliberately trying to cool their economy. Thanks for posting this.

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Armsbend

No stock market drops 25% because of Central Bank actions. Every industrial nation – EVERY SINGLE ONE – has a central bank that plays with credit to heat or cool the economy. We have Fed hikes or decreases to control credit for instance.

After a Fed meeting – or after 5 years worth of meetings – our market doesn’t drop 25% in a year unless there are serious underlying issues with it – which of course has happened (2008’s housing crisis was the last time). In China’s case – it is the ongoing trade war. No one in business is debating that unless they work for the propaganda arm of the Chinese government.

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Schmidt.Capela

I believe this large a loss is plausible when government forcefully shaves 0.5% of GDP growth to keep such growth within a manageable range, as China did. Can you imagine how the shares of US companies would react if the US GDP growth prediction was reduced from about 3% to 2.5%?

It’s not just that, of course. There are other factors at play, such as the deleterious effect such accelerated growth can have on the economy (the US Federal Reserve finds any growth above 3% to be prone to highly damaging bubbles, and China has been growing at over twice that for decades) and, of course, the trade war. But I believe China imposing tight controls on credit availability to be the main reason for the fall.

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Armsbend

You may be right – strong points.

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Mr.McSleaz

“the US Federal Reserve”

There is Nothing “U.S.” about the Federal Reserve. It is a Private entity owned by Foreign, Private Citizens & the land it sits on is Not American Soil………Just Sayin’.

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Armsbend

It has the same bearing on their economy as it does the United States. The US stock market is not the US economy. Every stock market is as it’s simplest core – active supply and demand of company ownership. However, what it does do is give a very strong indicator for confidence in a nation’s economy.

A 25% drop – whether that is in the US or China is an indicator there is a problem. The problem can be many things – but there is no question that there is a problem.

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Schmidt.Capela

More like confidence in the publicly traded companies being able to pay fat dividends to their shareholders. Which, while related, isn’t exactly the same as confidence in the economy. It’s why some actions that result in a stronger company — such as purchasing a competitor — tend to result in the fall of its stock price; while its long-term prospects improve, in the short term it has less cash at hand to pay shareholders with, so the stock price falls.

Also, China is much better prepared to tackle internal imbalances than the US will ever be due to its different approach to the economy. China is able — and willing — to directly influence its economy in many ways, manage it in ways the US would never dare. On one hand it means Chinese companies will, for the foreseeable future, always be subject to the whims of the government; on the other hand it means China can directly prop up flailing sectors of its economy and puncture economic bubbles before they can cause damage, which is likely why it was able to grow for a long time at breakneck speeds without crashing and burning.

Put this together with the sheer amount of political power the Communist Party has in China and it’s easy to see why stock prices don’t bother the Chinese government.

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Armsbend

The question I have is – is China really sophisticated enough to handle those types of challenges? They have been laregly unproven as far as dramatic rises vs. dramatic falls. So it is one thing to say you can meet those challenges by propping up certain sectors but another thing to do it.

We’ll see I guess. Don seems to be committed to this war. I personally think he has no intent on seeing it being resolved in the near term. His goal is to permanently weaken the Chinese Dragon and move higher end production to the US.

One last thing – the stock market may outwardly not take a large toll on the overall government – but party member’s personal wealth being eroded will most certainly take it’s toll. I have no doubt many top party members likely have made and then lost – great sums of wealth in this bear market.

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Schmidt.Capela

They have been laregly unproven as far as dramatic rises vs. dramatic falls.

China might have the best track record ever as far as sustained high growth is concerned; according to the World Bank, since 1991 China has been growing at over 6% per year, with a couple peaks of growth above 14% per year, without crashing ever once. Heck, last time China’s economy shrunk was back in 1976, more than four decades ago, and since then China has grown every single year more than the US is expected to grow this year.

His goal is to permanently weaken the Chinese Dragon and move higher end production to the US.

Meanwhile, China has set in motion a plan to not be dependent on the US for anything. Part of that plan was hatched only recently, with the US sanctions on ZTE — one of the largest Chinese electronics company — that almost bankrupted the company; China wants to make sure the US will never again be able to threaten one of its flagship companies like that, and for that purpose is now insulating its supply chain by, among other things, making sure all the high-end components that were previously sourced from the US, or from US allies that agree to enforce US sanctions, can be produced in China (or in Chinese allies that flout US sanctions) if needed be.

Besides, the “permanently weaken the Chinese Dragon” part of Trump’s ambitions — to which China is giving ample internal publicity, with all the weight of its government-controlled press — serves as a clarion call for common citizens to help China weather down any and everything the US can throw at them. You might be familiar with how this works, creating an environment where anyone that as much as proposes opening dialogue with “the enemy” is labeled as anti-patriotic, perhaps even a traitor; the US government occasionally makes use of that rhetoric, with Trump particularly fond of it.

A side-effect of that strategy is that the Chinese government can’t capitulate to Trump even if it wanted to; it would decimate popular support for the government. Going forward, the combination of this kind of propaganda with the fact it isn’t completely untrue (as Trump’s America really do want to block China’s economic ascension) might create a whole generation of Chinese citizens with a stronger than usual anti-American bias.

One last thing – the stock market may outwardly not take a large toll on the overall government – but party member’s personal wealth being eroded will most certainly take it’s toll.

While this can indeed take its toll, a few factors might minimize it.

One, how much of the loss the affected people attribute to government errors; if the people that were affected by the market loses don’t blame the Chinese government, then the loss won’t reduce the government’s standing.

Two, how much of that loss is seen as a strategic retreat to have a stronger position in the future. The Chinese Communist Party is used to playing the long game, and I believe the current party line is that they need to fight the US-China trade war without making any concessions regarding their “Made in China 2025” plan, as even all the possible losses from the trade war would in the long term be less than what they would lose by dismantling their current plan to propel Chinese manufacturing to the front of the global technology race.

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Armsbend

Lol. Everyone who tracks this stuff has known from the outset that farmers will be the least affected by the tariffs. The government will write them a check – they always do. Putting farmers in serious financial risk is political suicide in the US. Certainly for the GOP.

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Yangers

The stock market isn’t like it is here – it’s mostly state managed. And they can never “go broke”.

Also, the Chinese are more than willing to wait Trump out.

Why do you think they are targeting Red States and Republican States? So he will be hammered in the Mid Terms.

They know they only have to wait him out – term limits in the worst case. If he loses the House or Senate his agenda is dead, and his trade war will die with it.

Trumps trade war has a finite life – him as President – the Chinese Government will be around a lot longer.

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Armsbend

Quite naive and you are making the assumption that the Chinese people – who number over 1 billion – will be totes cool with having their new found wealth – suddenly stripped away. China has a stranglehold over their people – it is true – is that stranglehold unbreakable? Never. They know that – it is the reason the Revolution happened in the first place.

You are also making the assumption that Trump won’t win in 2020. Also that he won’t choose a successor after that period – possibly with a fellow like Pence. None of us can know that.

Can the Chinese hold out – as the US permanently shifts production back to the US maybe never to return – for 12 years? I don’t know. What I do know is that the Chinese do not want to find out. There is no question who has the upper hand in this trade war – barring military action.

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Schmidt.Capela

Quite naive and you are making the assumption that the Chinese people – who number over 1 billion – will be totes cool with having their new found wealth – suddenly stripped away.

Wait, what? The stock prices falling has little to no effect on the vast majority of the population, who doesn’t invest in the market.

If you want to see how prosperous the common people are you need to look instead at how wages are evolving, and average wages in China are consistently increasing. Which isn’t unexpected, as in China the GDP growth outstrips population growth by 6% or more.

Can the Chinese hold out – as the US permanently shifts production back to the US maybe never to return – for 12 years?

Quite likely yes, and in fact the Trump policies are likely to improve Chinese fortunes. The Chinese strategy for the next few decades, in place since before Trump won the election, seems to be to increase its ties to all nations in the Southern Hemisphere, heavily investing in transport infrastructure that should reduce logistic costs and serving as the main benefactors for those nations, occupying the role that the US used to play in decades past; China is planning to invest trillions of dollars to make this happen, and is involved in the creation of not just one, but two global banks to take over in those regions the role that used to be played by the US-controlled IMF. With the US choosing to retreat from the global scene and turn to protectionism, Trump basically handed Africa and Asia on a silver platter to China.

Besides, protectionism (and, just as important, uncertainty about what Trump will do next) is likely to displace the US from global supply chains, leaving a vacuum that China is all too eager to fill. For too many countries China is already a more important trading partner than the US; if they had to choose between ditching the US or ditching China the sensible choice would be to ditch the US, and should the US engage in a trade war with such a third party country the point might be moot.

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Armsman

At this rate Tencent won’t be worth a plugged nickel soon….

[Thank you, thank you…I’m here all week. :P]