China’s Tencent  was granted official approval to distribute Nintendo’s games and blockbuster Switch console in the country last week, as the Shenzhen-based tech conglomerate doubles down on its gaming roots to rekindle profit growth after a shock drop last quarter.
The partnership is a “big deal”, Jefferies Asia managing director Atul Goyal told CNBC, adding that Nintendo’s family-friendly titles should be an easy sell to Chinese moral gatekeepers. Approval for new games was suspended early in 2018, after governmental departments underwent restructuring, creating complications for Tencent, whose mobile titles dominate Chinese gaming.
Nintendo’s  stock surged 14% to JPY 39,200 on Friday and was still at JPY 37,170 by Tuesday close. However, the reaction from Tencent investors was more tepid, with its share price rising a mere 0.3% to HKD 393. But shareholders have been able to enjoy a 7.6% rise since 22 March, despite Tencent having revealed that Q4 profits had dropped by a third year-on-year, partly due to release hold-ups from lengthy censorship vetting. The stock is up 28% year-to-date, and 56% since October’s 18-month low of HKD 252.20.Tencent 1-year share price performance, CMC Markets, 25 April 2019
While Tencent’s gaming division has traditionally focussed on China, the company has long been looking beyond the country’s border. It acquired Finnish Clash of Clans developer Supercell in 2016, which has stakes in triple-A studios from Activision Blizzard to Ubisoft, and owns 40% of Epic Games, whose addictive, highly-profitable Fortnite is still to make a foray in China.
Percentage of Epic Games owned by Tencent
Tencent has also been experimenting with cloud gaming, a technology that jumped to the forefront of investors' attention since Google [GOOGL] and Apple [AAPL] unveiled their own cloud-powered platforms in March – named “Stadia” and “Arcade” respectively. The platform may just be a way of hedging against future Chinese incursions by Silicon Valley, Kantan Games’ CEO Serkan Toto told CNBC.
Tencent has also been backing Chinese game-streaming platform Douyu with $630m being invested last year as part of a strategic agreement. Similar to Twitch, which is also backed by Tencent, Douyu is valued at $500m and filed for a US IPO this week. Beyond gaming, Tencent is a big player in the entertainment sector – it’s the official Chinese distribution partner for Universal Music, which it might even bid to buy, according to recent reports – and analysts see growth potential in its online advertising division.
|Quarterly Revenue Growth (YoY)||27.90%|
Tencent stock vitals, Yahoo finance, 25 April 2019
The company also wants to monetise its cloud capabilities beyond consumer markets, acting as a vendor to other businesses as well as non-commercial customers. For instance, its social media app, WeChat, has become to Chinese businesses what Google Pay or Facebook Messenger is to retailers in America and Europe. “Tencent is transforming from consumer Internet to industrial internet,” Morningstar analyst Chelsey Tam wrote. “[It] is advancing into finance, government, smart retail, and industrial verticals.