Why Tencent Stock Dropped Today

Shares of Tencent (TCEHY -9.64%) were down 10.3% as of 12 p.m. ET Friday after Chinese authorities proposed new rules aimed at curbing excessive online gameplay and spending.

China’s new round of online gaming rules

In a draft document released this morning, regulators from China’s National Press and Publication Administration say they’re seeking public comment on several new proposed restrictions for online gaming companies in the country. Among those restrictions are a ban on daily login rewards, lower recharging limits with warnings issued to users who exhibit “irrational consumption behavior,” and requirements that game makers abstain from offering users high-value or expensive virtual transactions.

At a glance, Tencent has much to lose if these rules hamper its gaming business. The Hong Kong-based company offers so-called “mini-games” through its popular messaging and social media app WeChat, holds a roughly 40% stake in Fortnite creator Epic Games, and generated around 21% of its total revenue last quarter from its domestic games segment. Around 9% of Tencent’s total revenue last quarter came from games outside of China.

Why Tencent should be just fine

Even so, Tencent insists the rules won’t significantly impact its domestic games segment.

“These new measure do not fundamentally alter the online gaming business model and operations,” Tencent Games VP Vigo Zhang said in a statement. “They clarify the authorities’ support for the online gaming industry, providing instructive guidance encouraging innovation of high-quality games.”

In the end, investors should note these proposed rules aren’t set in stone yet. And industry watchers expect to receive more clarity on the guidelines from Chinese authorities in the coming weeks. Whether those guidelines truly hurt Tencent’s gaming business remains to be seen. But it’s no surprise to see the stock pulling back hard as the market recoils at the news today.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tencent. The Motley Fool has a disclosure policy.

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