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Business

Investments could flow back into China as companies avoid U.S. delisting

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Chinese e-commerce giant Alibaba was one of the 100 over companies that had faced the risk of delisting in the U.S. in 2024 if their audit information was not made available to PCAOB inspectors.

Budrul Chukrut | Sopa Images | Lightrocket | Getty Images

Investors could regain the confidence to put their money in Chinese tech stocks as these companies avoid delisting from U.S. stock exchanges and the Chinese government pledges policy support, according to one investment manager.

Last week, U.S. accounting watchdog the Public Company Accounting Oversight Board said it gained full access to inspect and investigate Chinese companies for the first time, after China finally granted the U.S. access in August.

More than 100 Chinese tech companies such as Alibaba, Baidu and JD.com had faced the risk of delisting in the U.S. in 2024 if their audit information was not made available to PCAOB inspectors.

Investors often grapple with a lack of transparency into Chinese stocks.

“It will allow institutional investors to come back. Professional investors were very scared about this delisting risk which was why they have stayed on the sidelines,” Brendan Ahern, chief investment officer at U.S.-based investment manager KraneShares, told CNBC’s “Squawk Box Asia” on Wednesday.

As of Sept. 30, there were 262 Chinese companies listed on U.S. exchanges with a total market capitalization of $775 billion, according to the United States-China Economic and Security Review Commission.

“With that risk going away based on the PCAOB announcement, you are going to see investment dollars flow back into these names,” said Ahern.

“These internet giants are really where investors want to invest when it comes to China,” said Ahern.

But he also caveated that it is still “early days, weeks, months to see that capital return back into the space.”

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But he also noted policy support will help to boost growth for these companies. Last week, China pledged to raise domestic consumption next year, as the country moves toward boosting growth after exiting its zero-Covid policy.

“2023 is a year where we are going to have a lot of government policy support such as raising domestic consumption,” said Ahern. “About 25% of all retail sales goes through the companies.”

“The Chinese government actually needs these internet companies, which explains why we have seen a backing off on some of the regulatory scrutiny we experienced in 2021,” said Ahern.

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Business

Shares of Assassin’s Creed maker Ubisoft plunge after Tencent ups stake

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Tencent has increased its stake in French games maker Ubisoft, the company behind popular franchises like Assassin’s Creed. But analysts said this has effectively closed the door on a full takeover of the company.

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Shares of games developer Ubisoft plunged more than 16% on Wednesday after prospects of a full takeover were dampened following a move by Chinese tech giant Tencent to increase its stake in the company.

On Tuesday, the two companies announced that Tencent invested 300 million euros ($296.9 million) in Guillemot Brothers Limited, amounting to a 49.9% stake in the company. Tencent only gets 5% voting rights in the company.

Guillemot Brothers Limited is controlled by the Guillemot family, and is the entity that controls the majority of the family’s roughly 15% stake in Ubisoft.

The Guillemot brothers founded Ubisoft in 1986 and have fought hard to keep the company independent and protected from a takeover.

Tencent’s investment values Ubisoft shares at 80 euros each, an 83% premium on Tuesday’s closing price and gives it an indirect stake in the French games developer.

The move effectively closes the door on a full takeover of Ubisoft by any party, according to analysts, something that investors were holding out for.

“What this transaction does appear to signal is that any full sale of Ubisoft to a strategic or financial buyer is very unlikely. In our view this should be seen as a net negative for shares (though not for the company itself),” analysts at Cowen said in a note Tuesday.

As part of the deal, Tencent is able to increase its direct stake in Ubisoft from 4.5% currently to 9.99% of the capital or voting rights. But Tencent will not be able to sell its shares for five years and will not be able to increase its stake in Ubisoft beyond 9.99% for a period of eight years. That effectively rules out a complete takeover of the gaming firm.

Ubisoft’s drama began in 2015 when French media conglomerate Vivendi took a stake in the European gaming firm, eventually becoming its biggest shareholder. But the Guillemot family were determined to keep the company independent.

In 2018, after a three-year battle, Vivendi dropped its pursuit of Ubisoft. Tencent stepped in to buy some of the Ubisoft shares Vivendi offloaded and the Chinese tech giant ended up owning a 5% stake in the games company.

Ubisoft has faced a number of challenges including sexual harassment allegations and a lack of new hit titles.

Tencent’s investment continues a flurry of deals in the video games space this year, particularly from Asian firms, that began with Microsoft’s proposed $68.7 billion acquisition of Activision Blizzard in January followed by Sony’s takeover of Bungie, the maker of hit games Halo and Destiny.

Tencent, based in Shenzhen, China, has grown into one of the world’s largest gaming companies over the years, through acquisitions of and investments in smaller studios with popular global titles including League of Legends maker Riot Games, for example.

Tougher regulation around gaming in China has pushed Tencent and its rival NetEase to expand overseas through investments and acquisitions.

Ubisoft is known for some popular franchises including Assassin’s Creed and Rainbow Six. Ubisoft scheduled an event for Saturday to reveal details about upcoming games.

Tencent has typically helped companies it has invested in to run independently, but offered a hand to expand titles into China and onto mobile, where it has typically been strong.

Martin Lau, president of Tencent, said that the two companies will continue “to develop immersive game experiences” and bring Ubisoft’s most well-known franchises to mobile.

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Technology

Sony, Tencent, NetEase continue deal hunt to expand new formats, markets

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Revenue from mobile games accounts for more than half of the mobile gaming market. Sony is looking to diversify beyond consoles with its new dedicated PlayStation mobile gaming division.

Mateusz Slodkowski | SOPA Images | LightRocket via Getty Images

Sony

Sony’s PlayStation has dominated the gaming console market for a long time.

But the business model for console gaming has changed. It’s not just about selling the hardware and then hoping people buy new games. It’s about continuing to milk revenue from those games via regular updates that people spend money on and selling subscription services too.

Sony’s deal flow, particularly with the acquisition of Bungie, highlights this push.

“Their goal is to have enough content to incentivize players to buy their proprietary hardware, pay a monthly fee for the subscription service operated by PlayStation (PS Plus), and purchase the occasional digital game through the PlayStation Store, for which Sony receives approximately a 30% cut,” Tom Wijman, market lead for games at data company Newzoo, told CNBC.

“Snapping up studios is the most failsafe way to ensure exclusive content for their ecosystem — especially in reaction to the acquisition spree of Microsoft, one of Sony’s main competitors in the gaming space.”

Sony is also looking to expand beyond consoles. Last week, the Japanese giant said it is setting up a dedicated unit to oversee the development of mobile games, a relatively new venture for the company, which has been so dominant in consoles for years.

The acquisition of Savage Game Studios, which is dedicated to mobile games, is another key part of the strategy.

“Sony is stepping out of their comfort zone to stay competitive,” Wijman said.

Revenue from mobile gaming accounts for more than 50% of the total gaming market, whereas consoles make up about 27% of sales, according to Newzoo. So, Sony is going after an even bigger piece of the pie.

Sony’s acquisitions will help it bolster its intellectual property and library of games as it looks to expand into mobile gaming.

Tencent and NetEase

China’s two largest gaming players Tencent and NetEase have faced a tougher domestic market, amplifying the importance of their investment and acquisition strategies overseas.

Last year, Chinese regulators restricted the amount of time those under 18 years old could play online games and froze the approval of new titles. In China, games need the green light from regulators to be released and monetized. Those approvals only restarted in April.

Meanwhile, a resurgence of Covid-19 in China and subsequent lockdowns across major cities in the country has hurt economic growth. That led to the worst quarter of revenue growth for some of China’s technology giants, including Tencent.

With a more challenging domestic market, Tencent and NetEase have looked abroad for growth via acquisitions and investments.

“Tencent and NetEase have built up their gaming business primarily in their home turf China. Now that their home market is becoming increasingly regulated and difficult to operate in, these two companies will accelerate their global expansion strategy,” Wijman said.

Tencent owns or is invested in some of the biggest gaming companies in the world, including League of Legends developer Riot Games.

NetEase’s strategy has focused on acquiring high-profile intellectual property. With the Quantic Dream acquisition, the Hangzhou-headquartered firm has access to publish an upcoming Star Wars Game. NetEase has already released mobile games based on the Harry Potter and Lord of the Rings franchises.

For the two giants, having stakes in or owning the studios behind international mega hits in the gaming world has become a key part of the strategy.

While NetEase has traditionally been less aggressive than Tencent in its deal activity, it has ramped up efforts over the last year.

Another part of the investment strategy for both companies also highlights their ambitions in the console sector. NetEase and Tencent have mostly grown by focusing on PC and mobile gaming, not consoles which were banned in China for 14 years until 2014.

But the two behemoths have begun to turn their efforts toward console gaming.

NetEase hired a console industry veteran to run its Japanese game studio earlier this year. And Tencent-owned developer TiMi Studio has opened offices in Montreal and Seattle to focus on PC and console games.

Acquiring and investing in other gaming studios again can help both companies gain access to IP for games on consoles too.

Tighter regulation in China and the search for growth could propel NetEase and Tencent to continue their investment and acquisition strategy.

“Lastly, if the regulation from the Chinese government continues to pressure NetEase and Tencent in their home markets, I think they too will be eager to look into M&A,” Wijman said. “Their global expansion strategies have only just gotten started.”

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Business

Hong Kong’s Hang Seng leads gains in Asia; Alibaba shares soar

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SINGAPORE — Shares in Asia-Pacific rose in Friday morning trade, with investors monitoring shares of Alibaba in Hong Kong after the Chinese tech giant posted better-than-expected fourth-quarter earnings on Thursday.

In Friday morning trade, shares of Alibaba in Hong Kong surged 12.08% after it reported Thursday fourth-quarter earnings of 7.95 yuan ($1.18) per share, excluding items, on revenues of 204.05 billion yuan ($30.28 billion).

That was higher than analyst expectations for earnings of 7.31 yuan a share on CNY199.25 billion in revenue, according to StreetAccount.

Other Chinese tech stocks in the city also saw big gains, with Tencent rising 3.71% while Netease surged 5.39%. The broader Hang Seng index in Hong Kong climbed 2.78%.

Mainland Chinese stocks also traded higher, with the Shanghai Composite up about 0.5% while the Shenzhen Component advanced 0.845%.

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The Nikkei 225 in Japan gained 0.88% as shares of conglomerate SoftBank Group surged 4.47%. The Topix index advanced 0.62%. South Korea’s Kospi also jumped 1.15%.

In Australia, the S&P/ASX 200 climbed 1.07%.

MSCI’s broadest index of Asia-Pacific shares outside Japan traded 1.57% higher.

Overnight on Wall Street, the S&P 500 jumped 1.99% to 4,057.84. The Dow Jones Industrial Average surged 516.91 points, or 1.61%, to 32,637.19. The tech-heavy Nasdaq Composite outperformed as it rose 2.68% to 11,740.65.

Currencies and oil

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 101.691 — off levels above 102.2 seen earlier in the week.

The Japanese yen traded at 127.01 per dollar, still stronger than levels above 127.8 seen against the greenback earlier this week. The Australian dollar changed hands at $0.7103, holding above the $0.705 level that it momentarily fell below earlier in the week.

Oil prices were higher in the morning of Asia trading hours, with international benchmark Brent crude futures rising around 0.2% to $117.61 per barrel. U.S. crude futures hovered above the flatline, trading at $114.14 per barrel.

— CNBC’s Samantha Subin contributed to this report.

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Business

Alibaba and JD.com soar as China pledges to support markets

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Chinese- and Hong Kong-listed stocks soared on Wednesday after China’s government pledged to support beleaguered markets.

The Hang Seng
HSI,
+9.08%
surged 9% as state-run Xinhua News Agency said the government would take a number of market-friendly steps.

The Shanghai Composite
SHCOMP,
+3.48%
rose 3.5%.

China’s financial stability and development committee called for monetary policy to support the economy, and that authorities should prudently introduce policies that have a contractionary impact.

The Chinese government also is working with U.S. authorities to support listings overseas, as the Securities and Exchange Commission last week identified Chinese companies that could be delisted over the issue of auditor access.

JD.com
9618,
+35.64%

JD,
+7.08%
jumped 36%, Alibaba
9988,
+27.30%

BABA,
-1.29%
rallied 27% and NetEase
9999,
+23.40%

NTES,
+3.79%
surged 23% in Hong Kong trade.

Other Hong Kong tech stars also jumped, including Meituan
3690,
+32.08%
and Tencent Holdings
700,
+23.15%.

The committee also said it would keep Hong Kong’s financial markets stable while enhancing regulatory communications and coordination with Hong Kong regulators.

“Having disappointed markets earlier in the week by not cutting interest rates, China’s state economic policy apparatus is taking significant coordinated steps to support risk sentiment. These include State Council support for overseas listings, engaging with the U.S. on ADRs, and perhaps most importantly, suggesting that regulation of its big tech firms will end soon. There are also promises to step-up support for the real estate sector,” said Stephen Innes, managing partner at SPI Asset Management.

Even with Wednesday’s surge, the Hong Kong index is down 14% this year, compared to the 11% drop for the S&P 500
SPX,
+2.14%.

The remarks didn’t address another factor that’s been weighing on Chinese stocks, the possibility of sanctions from the U.S. if the country provides arms to Russia.

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Business

U.S.-delisting fears resurface for dual-listed Chinese companies

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The Chinese and Hong Kong flags flutter as screens display the Hang Seng Index outside the Exchange Square complex, which houses the Hong Kong Stock Exchange, on January 21, 2021 in Hong Kong, China.

Zhang Wei | China News Service via Getty Images

Hong Kong shares of dual-listed Chinese companies including Nio, JD.com and Alibaba plunged in Friday trade after fears of U.S.-delisting resurfaced.

By Friday afternoon in the city, shares of tech behemoth Alibaba fell 6.56%. EV maker Nio, which debuted in Hong Kong a day earlier, saw its shares plunge 11.64%. Baidu declined 5.14% while NetEase slipped 6.94%.

JD.com plummeted 15.67% after reporting a quarterly loss on Thursday.

The broader Hang Seng Tech index dropped 7.55%.

Those losses tracked declines for some U.S.-listed Chinese stocks overnight amid renewed concerns over potential delistings stateside.

The U.S. Securities and Exchange Commission recently named five U.S.-listed American depositary receipts of Chinese companies which they said failed to adhere to the Holding Foreign Companies Accountable Act. ADRs represent shares of non-U.S. firms and are traded on U.S. exchanges.

The China ADRs flagged by the SEC are the first to be identified as falling short of HFCAA standards. The act permits the SEC to ban companies from trading and even be delisted from U.S. exchanges if regulators stateside are unable to review company audits for three consecutive years.

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Still, UBS Global Wealth Management’s Hartmut Issel remains positive on the affected Chinese stocks, though he admits it’s “not for the faint hearted.”

The fundamental value of these companies will not be affected, Issel, head of Asia-Pacific equities and credit at the firm, told CNBC’s “Street Signs Asia” on Friday: “Virtually all of them, the big ones anyway, these ADRs … their business is exclusively in China.”

“Virtually now all of them have also Hong Kong listing,” Issel added. “As an investor you just have to move over if there is an actual delisting [in the U.S.].”

Furthermore, he said: “We do know that the Chinese and also U.S. authorities are in contact, they could salvage it.”

— CNBC’s Bob Pisani contributed to this report.

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US

Hong Kong’s Hang Seng to drop Evergrande from China Enterprise index

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A housing complex by Chinese property developer Evergrande in Beijing. The indebted Evergrande has remitted the funds for a key interest payment that was due Sept. 23 — ahead of a 30-day grace period, Chinese state media Securities Times reported.

Noel Celis | AFP | Getty Images

Evergrande’s stock dipped 1.44% on Monday morning. Year to date, the stock has plunged more than 80%.

In place of Evergrande, Hang Seng is adding biopharmaceuticals firm Innovent Biologics to the China Enterprises index.

Changes to the Hang Seng

As for changes on the Hang Seng index, China Resources Beer and ENN Energy Holdings will be added to the index in addition to the inclusion of JD and Netease. The latest update increases the number of stocks under the main index to 64, from the current 60 stocks.

Shares of JD jumped nearly 2% on Monday morning, while Netease was up nearly 3%.

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S&P Global Ratings said in a Monday note that JD’s business model is “well positioned” for China’s strained conditions.

“The online retailer is outperforming its peers in China during a resurgence of COVID cases in the country and faltering consumer sentiment amid a housing downturn,” S&P said.

“JD.com has also been investing heavily for years now in its logistics and supply chain infrastructure. This has given the entity better control over supply chains while its competitors were hit with outages,” the report said.

S&P Global Ratings expects JD’s revenue to jump more than 18% per year in the next 18 to 24 months.

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Business

Moderna, Lululemon, GameStop and more

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Moderna’s sign is seen outside of their headquarters in Cambridge, MA on March 11, 2021.

Boston Globe | Getty Images

Check out the companies making headlines in midday trading.

Moderna — Shares of the drug maker rose more than 7% after announcing it’s developing a two-in-one vaccine booster shot that protects against both Covid-19 and the seasonal flu. The new vaccine, which the company is calling mRNA-1073, combines Moderna’s current Covid vaccine with a flu shot that’s also under development, according to a press release.

Lululemon — The athleisure brand jumped 12% and hit an all-time high after reporting strong second-quarter earnings and said it’s on track to hit a 2023 revenue target ahead of schedule. The company has outperformed other retailers during the pandemic and is poised to continue to even as people return to offices.

GameStop — Shares of the video game retailer fell 2.7% even after the company posted a narrower loss in the second quarter compared with a year prior and rising sales. The retailer was light on providing an outlook for the upcoming quarters and details on its e-commerce transformation, which disappointed Wall Street analysts. The meme stock favored by Reddit traders is still up over 900% this year.

Boston Beer — Shares of the alcoholic beverage lost over 4% after it pulled its earnings guidance late Wednesday amid a slowdown in sales of its hard seltzer brand Truly. That development came just a few weeks after the company blamed weaker-than-expected second-quarter earnings on poor Truly sales, leading it to cut its full-year forecast.

RH — Shares of the furniture retailer popped nearly 8% after beating on the top and bottom lines of its quarterly results. RH earned $8.48 per share, topping estimates of $6.48 per share, according to Refinitiv. Revenue came in at $988.8 million, above expectations of $975.4 million.

Caesars Entertainment — Caesars shares gained 3% after the company announced it will sell the non-U.S. assets of its William Hill sports betting unit to British gambling firm 888 Holdings. The deal is worth about 2.2 billion pounds, or roughly $3 billion.

NetEase — Chinese regulators summoned NetEase and other gaming companies to remind them of restrictions on game time for children. Shares of NetEase retreated 2.7%.

Analog Devices — Analog Devices shares added 2.8% after the company announced its acquisition of rival chip maker Maxim Integrated Products is expected add to adjusted earnings in 12 months after closing, six months sooner than previously expected. Analog Devices said it expects the acquisition to be neutral to adjusted earnings in fiscal 2022.

Macy’s — Shares of the retailer gained 1.5% after Cowen upgraded the stock to an outperform rating, saying the stock can jump almost 30%. The firm pointed to the retailer’s digital push, as well as product innovation and pricing management as factors that will drive upside. Shares of Macy’s have nearly doubled this year.

Ford — Shares of Ford dipped 1.4% after the automaker said it would end vehicle production in India, costing about $2 billion. The company is shutting down two large plants in the country and about 4,000 people are expected to lose their jobs.

Blade Air Mobility — Shares of Blade surged over 15% after JPMorgan said the aerial ride-sharing company could be the Uber of the skies. The firm predicts an 80% rally ahead for Blade and believes the aerial ride-sharing market could be worth tens of billions of dollars within a decade.

Leslie’s — Shares of Leslie’s rose 2.6% after Stifel initiated coverage of the pool stock with a buy rating. The firm said the stock is currently undervalued as Leslie’s is poised to “build upon its leading market share” in the pool and spa market.

— CNBC’s Pippa Stevens, Yun Li, Maggie Fitzgerald and Tanaya Macheel contributed reporting

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Business

Tencent stock falls after Chinese regulators summon gaming firms

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Tencent Games shows off its latest titles at the China Joy gaming conference in Shanghai on Friday, July 30, 2021.

Arjun Kharpal | CNBC

GUANGZHOU, China — Shares of Tencent and Netease fell on Thursday morning after Chinese regulators called them and other gaming companies for an interview, reminding them of restrictions on game time for children.

China’s propaganda department, cyberspace regulator and other authorities said they would “seriously deal with” any violations of their rules.

Tencent shares were down more than 5% in morning trade in Hong Kong, while NetEase fell more than 6%.

The regulators reminded gaming companies they need to limit game time for children under 18 years of age. Under rules announced last month, kids are not allowed to play online games for more than 3 hours per week — and only during specific times and days. The Chinese government has long been concerned about the impact of gaming on the physical and mental health of children.

Gaming companies should also be controlling their content, including banning “illegal” content such as pornography, the regulators said.

Authorities also said that unfair competition and monopolies should be avoided. China’s market regulator said last month that internet companies across the board should avoid unfair competition, and issued draft rules that target such practices.

Companies should also change game designs that get users addicted, they said.

In response, gaming companies said Thursday that they seek to comply with the guidance from regulators.

“We believe in healthy game play and take very seriously the physical and mental health of minors. We appreciate the guidance and instruction from the relevant regulators, and will work hard to be in full compliance with all rules relating to youth game addiction and content regulation,” Tencent said in a statement to CNBC.

NetEase also added that it will comply, saying in a statement to CNBC that it “will strictly follow the rules and instructions over anti-addiction measures for minors in games.”

“We will continue our efforts to deliver more quality games and promote a healthy and responsible gaming environment for minor players, as we seek to build and promote a wholesome gaming environment in China,” the firm told CNBC.

Could gaming firms’ revenue-generating models get hit?

The warnings from the meeting with the regulators do not appear to be overly new. Instead, they repeat past restrictions around limiting gaming time for minors, removing content authorities deem as “illegal” and trying to stop unfair competition and monopolies.

However, comments from the authorities about getting companies to adapt game designs could stoke fears about changes to their business models that rely on players spending money.

For a long time, Chinese regulators have been concerned about gaming addiction among young people.

Last month, an affiliate publication of the official Xinhua newspaper, ran an article calling gaming “opium.” The piece was later removed and republished with references to the drug removed, but it sparked fears among investors that further regulation could come to gaming.

The industry has already gone through bouts of regulations over the years. In 2018, regulators froze game approvals over concerns about children’s eyesight.

Gaming giants have said they will not be overly affected by continued restrictions on kids’ playing time. Tencent said only a small amount of gaming revenue comes from younger players in China. In the second quarter, 2.6% of gross game receipts in China were derived from players under 16 years old.

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Business

China cuts kids’ online gaming time: Tencent, NetEase shares fall

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China’s National Press and Publication Administration said minors will only be allowed to play online games for up to three hours a week. That is a significant reduction from previous rules.

Zhang Peng | LightRocket | Getty Images

GUANGZHOU, China — Shares of China’s second-largest gaming company NetEase fell on Tuesday after regulators dramatically cut down the amount of time children were allowed to play games.

NetEase was down about 2.9% in afternoon trade in Hong Kong. Meanwhile, rival Tencent was down more than 3% earlier in the day but turned positive later in the day.

Analysts expect the latest directive to have minimal impact on China’s gaming giants, perhaps one of the reasons Tencent shares reversed course.

On Monday, China’s National Press and Publication Administration said children below 18 years old will only be allowed to play online games for up to three hours a week and only during specific times.

The ruling significantly reduced game time for minors who, under 2019 rules, were allowed to play for up to 90 minutes a day for most parts of the day.

Gaming is the largest source of revenue for NetEase and Tencent. But analysts don’t expect a huge impact on the companies as a result of the new rules.

Tencent has previously said only a small amount of gaming revenue comes from younger players in China.

“We estimate about 5% of gaming revenue comes from minors under 18 years old, and we believe there is about 3% earnings impact to Tencent if we assume gaming contributes about 60% of total earnings,” investment bank Jefferies said in a note published on Monday.

“Minors represent low singe digits of NetEase’s gaming revenue,” the analysts added.

For a long time, the Chinese government has been concerned about gaming addiction amongst the country’s youth. Content such as games is also tightly controlled in China. 

Tencent and NetEase have been through bouts of gaming regulation before.

In 2018, regulators froze the approvals of new game releases for several months. Tencent and NetEase have already made moves to restrict the amount of time young people play their online games for.

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