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TMFMmbop (34.36)

The End of Chinese Gaming Stocks?

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October 14, 2009 – Comments (8) | RELATED TICKERS: SNDA.DL , NTES

I find it curious that the PRC's General Administration of Press and Publication could announce that "Foreigners would be banned from operating online gaming within China through wholly foreign-owned investments, joint ventures or any other forms of co-operation with local companies" and that foreign-owned or JVs such as Shanda, Netease, and Changyou.com wouldn't see their stock prices budge.

Wouldn't these companies be worth a whole let less to American shareholders if said shareholders were banned from owning them.

Maybe this is my own paranoia, but generally when the Chinese government comes out against something, it's going to take that something down or exact considerations from said something (higher regulatory fees, for example). But this is curious, indeed. If you own any Chinese gaming stocks,  I'd encourage you to tread carefully and start reading the Chinese business press.

8 Comments – Post Your Own

#1) On October 14, 2009 at 5:23 PM, memoandstitch (< 20) wrote:

I think you misread the article.  The move was done to increase censorship and protect local game companies.  It doesn't ban foreign investors from owning class A shares of local game companies.  Also, there is no reason for them to do that.  U.S. IPOs of Chinese game companies have been very profitable for them.

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#2) On October 14, 2009 at 5:30 PM, outoffocus (23.08) wrote:

Yea I think you misread the article as well. "Foreigners would be banned from operating online gaming within China through wholly foreign-owned investments, joint ventures or any other forms of co-operation with local companies"

In other words I cant go into the chinese web market and start a "Out of Focus online" MMORPG.  But I can certainly invest in any mmorpgs that are operated by chinese investors.  Its protectionism at its best. Kind of like the tariffs we had on foreign cars so many years ago.

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#3) On October 14, 2009 at 5:58 PM, memoandstitch (< 20) wrote:

@outoffocus,

I don't think you even read TMFMmbop's comments.  He/She said

Wouldn't these companies be worth a whole let less to American shareholders

and my answer was correct that Shanda and Changyou will still be worth as much as before (if not more).

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#4) On October 14, 2009 at 6:02 PM, voy2k (< 20) wrote:

He may have misunderstood the specifics of this announcement (which frankly are quite unclear), but any way you slice it this is bad news for investors of Chinese online gaming stocks.  I bought NTES at 16 and have enjoyed the run-up to current values, but the second I saw these announcements re: the Chinese government getting involved, I dumped all of it.  At best, the confusion over GAPP's intentions will cause this stock (and the entire sector) to stagnate for a period of time.  At worst, the Chinese government may have just torpedoed a very dynamic market segment.

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#5) On October 14, 2009 at 8:32 PM, TMFMmbop (34.36) wrote:

I dunno @memoandstitch. This is the GAPP Chinese language announcement: http://www.gapp.gov.cn/cms/html/21/508/200910/466283.html

It explicitly forbids foreign ownership of or joint cooperation with Chinese gaming ventures. (See point 4, which is the window-looking character before the comma that is the section after the section started by the three horizontal lines on top of one another, which is the Chinese character for '3'.)

And remember that the companies that trade here in the US that are "Chinese" are actually US companies that either wholly own a Chinese subsidiary via various tex shelters (called a WOFE in China) or have a contract with a Chinese subsidiary whereby the sales and profits flow up out of China. If the government severs that link then the Chinese subsidiary will still exist, but American shareholders of the US parent (a shell if you will) will be SOOL.

Tim

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#6) On October 14, 2009 at 8:38 PM, TMFMmbop (34.36) wrote:

I dunno @memoandstitch. This is the GAPP Chinese language announcement: http://www.gapp.gov.cn/cms/html/21/508/200910/466283.html

It explicitly forbids foreign ownership of or joint cooperation with Chinese gaming ventures. And remember that the companies that trade here in the US that are "Chinese" are actually US companies that either wholly own a Chinese subsidiary via various tex shelters (called a WOFE in China) or have a contract with a Chinese subsidiary whereby the sales and profits flow up out of China. If the government severs that link then the Chinese subsidiary will still exist, but American shareholders of the US parent (a shell if you will) will be SOOL.

Tim 

 

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#7) On October 15, 2009 at 4:32 PM, TMFSun (46.41) wrote:

This is a good article that describes the ban. http://english.sina.com/technology/2009/1011/276736.html

 I would note two things:

-China's press and copyright authorities have banned foreign investors from operating online games "in any form" in the country.

-Foreign investors were also prevented from joining and controlling Chinese enterprises' online game operations by indirect means like forming agreements or offering technological support.

 

 

As Tim mentioned above, you have to remember that it doesn't matter that, in our eyes, NetEase, Shanda, etc. are Chinese companies listing abroad. In the Chinese government's eyes those are now foreign-owned companies operating domestically.

And you can argue it's protectionism but I don't know if that really holds up. The goals of protectionism are to increase domestic economic activity, but with these companies, the operating subsidiaries are in China, the employees are Chinese, and the Chinese earnings (while technically are entitled to us foreigners) are going to be re-spent in China. All of their economic activity already is in China--further protectionism isn't going to change anything.... 

Having worked and lived in China, I wonder if this isn't a deeper cultural issue that isn't as superficial as the market makes it seem.

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#8) On October 17, 2009 at 12:22 AM, memoandstitch (< 20) wrote:

I doubt that China will see a company that is majority-owned by the Chinese as a foreign-owned company.  I would be more worried about ATVI (activision-blizzard) because they will have problems selling world of warcraft in China.

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