Mon, 27 May 2019

Nintendo shares jumped after China's Tencent won approval to distribute one of the company's games for its Switch console, a sign the Japanese company may benefit from growth in the world's largest games market.

Tencent received approval for the test version of New Super Mario Bros. U Deluxe for the handheld device, according to a notice on the website of China's Guangdong provincial culture and tourism department.

A Nintendo spokesman confirmed that Tencent had applied for the sale of Switch hardware, but could not comment specifically on the Guangdong approval, saying it was just one part of the entire process. Nintendo's stock surged 14%, the most since July 2016 at the height of the Pokemon Go frenzy.

Gamer Population like 'dry sponge'

Tencent could prove an invaluable ally for the Kyoto-based company in China where gamers have historically shunned consoles in favor of smartphones and PCs. The alliance could provide a jolt to growth prospects for the Switch. Nintendo in January cut its outlook for the console's shipments, raising questions about demand for the three-year-old device.

"With its huge gamer population, China is like a dry sponge for Nintendo," said Hideyuki Ishiguro, a senior strategist at Daiwa Securities. "We're now starting to see a scenario for Switch sales to continue increasing and for earnings growth."

Tencent shares didn't trade in Hong Kong, which was closed for a national holiday. Its US-listed ADRs rose less than 1% on Thursday after the news.

Switch suppliers jumped on prospects of more hardware sales. Taiwan's Macronix International and Nan Ya Printed Circuit Board each rose at least 8%, while Japan's MinebeaMitsumi added 4.5%. Publishers which release games for the Switch also gained, with Bandai Namco Holdings and Konami Holdings both rising more than 3%.

World's largest gaming market

China is the world's largest gaming market, but consoles accounted for less than than 2% of industry revenue in 2018, researcher Newzoo estimated last year. Microsoft and Sony have seen limited demand since releasing their newest consoles on the mainland in 2014 and 2015, as gamers have opted to play free titles on their phones or on rented PCs at gaming cafes - instead of spending hundreds of dollars on dedicated devices they can use at home.

But the Tencent partnership may put Nintendo on different footing, with the prospect of a strong distribution network and the marketing prowess of a household name with Chinese consumers. Nintendo's family-friendly series like Zelda and Pokemon may also receive a warmer reception from Beijing regulators, which have hurt PlayStation and Xbox demand by not approving more-violent blockbusters like Grand Theft Auto and Call of Duty.

"Nintendo will be at the mercy of China's regulators and piracy dealers, but if more people try and enjoy the real thing, that's a plus for the Switch," said Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities.

New prospects with partnership

The partnership also raises prospects for releasing Nintendo's mobile games on the mainland or bringing Tencent's existing mobile titles to the Switch, which offers superior controls over smartphones. A fan-made video of gamers playing Tencent's Honour of Kings on the Switch was already making the rounds on Chinese social media sites. The title is already available for the Switch in Western markets and Japan.

"Although the market for games in China is incredibly huge, the market for dedicated video game platforms is small," Nintendo President Shuntaro Furukawa told investors in October. "So even if we were to enter into China, the challenges we would face there certainly would not be simple ones. Even so, I would very much like to try and see how receptive the Chinese market would be to Nintendo IP."

Nintendo could see a 20% to 30% jump in Switch sales with a China entry, but profit margins on both hardware and software would likely be lower than other regions due to revenue-sharing with Tencent, SMBC Nikko Securities Inc. analysts Eiji Maeda and Emi Maeda wrote in a report to clients on Friday.

The selection of the New Super Mario Bros. U Deluxe was puzzling. Originally released in 2012 for the Wii U, the aging title is hardly the ideal vehicle for showcasing the Switch's hardware. Still, Morgan Stanley analysts estimated it has a potential to be "a million unit seller per quarter." No other Nintendo games were mentioned by Guangdong regulators in their statement on Thursday.

The game has been available on the mainland through Nintendo's unique partnership with Nvidia, but has seen limited demand from Chinese consumers since being released there in 2017.

About 8.9 million of Nintendo shares traded on Friday, the highest since September 2016, with the turnover accounting for about 16% of all stock trading on the Tokyo Stock Exchange. Traders said that short-sellers - investors who had bet that shares will fall - were rapidly closing positions, contributing to the sharp price spike.

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