Key points

• In recent years, Chinese tutoring services and gaming companies have fallen away in the face of new legislation from the Chinese government, with share prices in those sectors tumbling as a result.
• These domestic policy challenges have led to these businesses either consolidating to become more resilient or adapting to pivot away from their traditional markets and looking towards the global market.
• With these companies having diversified their consumer-base and identified new global opportunities, these sectors are coming back stronger, with opportunities available to investors if some policy consistency can be found.

On December 22, 2023, the last trading day before the Christmas holiday, China’s top gaming regulator unexpectedly proposed new rules seemingly aimed at curbing consumer spending on video games. Hong Kong’s Hang Seng Tech index tumbled 4.4 per cent. Tencent Holdings, the world’s biggest gaming company by revenue, lost more than USD $40bn in market value. 

But in the past four months, the policy headwind has quietly eased. The proposed rules were removed from the regulator’s website in January. China’s approval of domestic gaming licenses has in fact accelerated this year - a total of 428 video games were approved for sale in the first four months, up 23 per cent from the same period of 2023. And the authorities approved the long-awaited “Dungeon & Fighter” mobile game, which Tencent originally planned to launch in 2020. 

Chart 1: New game approvals in China have picked up

China’s tutoring businesses went through a similarly disruptive, but longer chapter. In 2021, Beijing moved to ban after-school tutoring services from profiting on compulsory curriculum classes, like maths and English. Smaller players exited and the industry consolidated. Leading companies adapted by moving from mainstream curriculum classes to extracurricular activities, such as drama, calligraphy, programming, and chess. As a result, business is recovering gradually. The number of learning centres owned by one of China’s largest private-tutoring companies jumped 28 per cent to 911 as of the end of February from a year earlier.

Beijing has focused on stimulating the economy this year in part through its support for private businesses - crucial for technological innovation and jobs for young people. A pause in regulatory change for both online gaming and tutoring has provided a stable environment for companies to operate in. And, more significantly, the companies that survived have shown resilience by either fine-tuning existing strategies or finding new growth engines.

New realms

For the gaming sector, December 2023 was not its first policy hit. But the regulatory changes didn’t stop Chinese game developers from strengthening their capabilities and producing blockbuster titles such as “Genshin Impact,” which has gained global popularity. To counter the economic downturn at home, they have also invested more in overseas expansion. Our conversation with one leading firm’s management team revealed a deep understanding of what young gamers want and a pipeline of products to meet their needs. 

Leading tutoring companies have also proven resourceful with their expansion into areas such as non-school curriculum tutoring. Demand for private tutoring is strong in China, where parenting culture has long been known for its focus on education. When we visited a learning centre in Beijing earlier this year, we saw motivated parents with their children, hoping that classes from public speaking to drawing might help their kids excel in school or later in their careers. The company’s management is optimistic about business expansion thanks to diminished competition and the closure of smaller players. 

Nevertheless, risks remain. China’s declining birth rate poses a threat to tutoring companies. For many less-wealthy parents, non-academic private education is a discretionary expense, rather than a staple. When it comes to online gaming, weak consumer sentiment is a big challenge for growth. And regulatory uncertainty still looms over a longer time frame for both sectors. 

For the time being, however, while China shores up its economy, we think policy consistency will be critical to restoring confidence in the country’s stock markets and private sector. What do they need least? Another unwanted “gift” for Christmas.

Important information

This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes.