The Lightning Collapse of the Gaming Industry

"Today, let's discuss the gaming and education sectors.

To begin, let's talk about the sudden collapse of the gaming sector last Friday — the gaming sector has been a hot topic for many young investors for the past few years.

Whether it's the evolution of online platforms, the development of mobile gaming, or advancements in VR, AR, and other devices, all roads seem to lead to the gaming industry, making it a thriving and emerging field. However, this prosperity is not unstoppable like a wildfire; it comes with both risks and opportunities. Let's review the recent collapse of the gaming sector.

Chronology of Events:

On the news front, on December 22, 2023, at noon, the National Press and Publication Administration released the "Provisions on the Administration of Online Games (Draft for Solicitation of Comments)," creating ripples throughout the industry.

Article 18 explicitly stated that online games should not offer inducements such as daily logins, first-time recharge rewards, or consecutive recharge rewards. Publishing and operating units of online games should not promote or tolerate high-priced virtual item transactions through speculation or auctions.

All online games must set user recharge limits, publicly disclose them in their service rules, and provide pop-up warnings for users engaging in irrational consumption.

Affected by this, on the afternoon of the same day (Friday), when the market opened, stocks related to the gaming sector plummeted. By the closing bell, more than 20 related stocks, including Shengtian Network and Glacier Network, fell by over 17%, while companies like ZQGame, Baotong Technology, Perfect World, 37 Interactive, EHANG, and Gameville Network hit the daily limit. The gaming ETF also hit the limit.

On December 23 (Saturday), a spokesperson for the National Press and Publication Administration stated that the "Draft for Solicitation of Comments" aimed to safeguard and promote the prosperous and healthy development of the online gaming industry.

They introduced a dedicated chapter titled "Safeguard and Reward" and proposed a series of incentive measures. Simultaneously, regulations were established to protect the rights of minors and consumers. The drafting process involved extensive consultation with various departments, industry associations, and companies.

The spokesperson emphasized that the public solicitation of opinions for certain regulations is part of a broader effort to gather input, refine terms, and improve the regulations.

Concerns and suggestions raised by various parties regarding Article 17, Article 18, and other content in the draft will be carefully studied, and further modifications will be made based on continued input from relevant departments, companies, users, and other stakeholders.

On December 25 (Monday), the National Press and Publication Administration released the list of 105 newly approved domestic game licenses. This marked the first time that the number of approvals exceeded one hundred in a single batch.

Less than a week passed between the approval of this new batch and the approval of a batch of imported online game licenses on December 22. While theoretically one batch involves imported games and the other involves domestic games and may not directly interfere, the consecutive approvals within such a short period were undoubtedly seen as positive news.

Event Evaluation:

What does the "Provisions on the Administration of Online Games (Draft for Solicitation of Comments)" convey? In simple terms, it suggests that the gaming industry needs a comprehensive examination and restructuring. Today's notice outlines the areas where surgical interventions may be necessary, inviting additional opinions.

Due to the abrupt nature of the announcement, investors' unanimous response on that day was to minimize risks and avoid exposure to national policy-level risks. This behavior manifested in cashing out without regard to costs, leading to a sharp plunge in stock prices immediately after the market opened.

As for the weekend announcement, it can be interpreted as a signal that the gaming sector will not be completely uprooted. After the restructuring, it is expected to continue to exist and develop.

Regarding the license approval news on Monday, most investors interpreted it as a sweetener following the stick. It is important not to be too pessimistic, and the reassurance is more directed towards ordinary citizens who were alarmed rather than investors and gaming companies.

For an investor, the core of this event is the preparation for the restructuring of the gaming industry. Extracting this information is sufficient.

Regarding the specifics of when and how this restructuring will take place, this information is not crucial for those outside the gaming industry. As long as the policy remains uncertain, it remains a Damocles' sword hanging overhead, destined to fall sooner or later, regardless of how securely it is suspended.

As proven on December 25 (Monday), Giant Network, Kaiying Network, and 37 Interactive continued to hit the limit. 37 Interactive fell by more than 7%, and EHANG fell by more than 6%. Despite numerous positive stories, investors were honest in their actions, choosing to sell.

In the evening of the 25th, several gaming companies issued buyback announcements, attempting to salvage the market confidence on the brink of collapse. Some investors might be confused by these messages, thinking that the crisis has passed, and the gaming industry will continue to thrive as before.

There is a question that can instantly bring clarity: Between the clear announcement of policy adjustments for online games and the buyback announcements from gaming companies, which one carries more weight, impact, and credibility? I believe everyone has an answer in mind.

Whether there were any signs before the National Press and Publication Administration released this policy? It is important to note that policies for overhauling an industry are not decided overnight but involve extensive and prolonged research, discussions, and, finally, the formulation of an acceptable solution.

There are no impenetrable walls. In November, ByteDance underwent a significant contraction in its gaming business. At that time, seeing this news might have led one to think that the sector was not doing well. Now, looking back, can you understand it better?

Under the banner of ByteDance, many games are still popular in the market, including long-standing stable titles like 'Hua Yi Shan Xin Zhi Yue' and recently launched games like 'Jing He.' These are positive projects. If one realizes the impending danger, who would willingly sell or abandon such positive assets at a low price?

Now, let's shift our focus to the education sector. Some readers might wonder why we are comparing the gaming and education sectors. The reason is to trace back in time — the last sector to undergo a complete cycle of policy reversal was education.

First, let's clarify what a policy reversal cycle is. Simply put, it is when most investors believe that policies might impact the industry ecosystem, disrupting established norms and patterns. In contrast, a pro-policy cycle, or a positive policy cycle, is when most investors support and acknowledge the positive effects of policies.

An opposite example will make this clearer. Take chips, for instance — many industries aim for substantial development by solving bottleneck problems, making chips an industry widely supported by all parties. As soon as a technical buying point appears, participation is encouraged.

Looking back at the development of the education sector, it provides a clear view of the trend after a policy reversal cycle. This approach can help predict the future prospects of the gaming industry to some extent.

Let's start with the most straightforward things: The Education ETF (513360), starting from 0.8 yuan in July 2021, embarked on an uninterrupted decline, eventually falling to 0.28 yuan.

Now, let's examine a specific stock example: the K-line of the "Maotai of the Education Sector"—Zhonggong Education.

Looking back at them now, they hold particular educational significance.

Speaking of the origin of the education sector's rectification, many investors who are not particularly focused on this part might not know that it didn't start suddenly with a widespread and intensive overhaul.

In fact, as early as 2018, the State Council's General Office issued the "Opinions on Standardizing the Development of Extracurricular Training Institutions," explicitly criticizing "some extracurricular training institutions" harshly.

The policy direction was set in 2018, and it wasn't until the middle of 2021 that the policy was implemented. In 2018, there were discussions about rectifying the chaos in educational institutions.

I believe that any investor who has looked into this can easily draw a superficial conclusion: avoid any education stocks! Because when they talk about rectification, it will undoubtedly happen, even if it hasn't occurred yet, it's just a matter of time.

Therefore, this sector is prone to an overnight collapse. At that time, some regretted missing out on a market surge, but in the end, they were glad to have avoided a fatal blow!

Looking back now, it's clear that participation in such a sector meant facing significant risks. Sensitivity is crucial, knowing which sectors to touch and which to avoid.

As for the current gaming sector, it is entering an inverse policy cycle. Of course, the development of these two sectors cannot be identical. From a market perspective, the gaming sector's performance currently doesn't seem as drastic as the education sector during its rectification.

The education ETF, at that time, experienced three consecutive limit-downs in shrinking volumes. The language used now is also not as severe; there is no direct naming and shaming. However, being in the same inverse policy cycle, it is worth learning from.

Finally, let's discuss practical strategies for the gaming sector in the current environment. As a practical trader, there's no need to delve into why the market is falling; instead, it's essential to research the potential risks that could lead to a future decline and take steps to safeguard oneself.

When evaluating the stock prices of the gaming sector, there might be short-term violent rebounds due to sudden and significant sell-offs. However, overall, it has become a high-risk industry that has attracted attention. Before this fundamental reality changes, the best choice is to avoid it. You might miss out on a rebound, but you can also avoid a disastrous fall.

With the precedent of the education sector, it's evident that, from a complete downturn to a gradual recovery, during significant negative crises, staying away from such a sector is the best solution. Don't think about trying to operate once again; compared to the risk of a complete loss, the potential gains are not worth mentioning.

A wise person does not stand under a crumbling wall.

When a sector faces a downturn, don't try to catch the falling knife; you might easily get cut. Wait until the knife falls to the ground, tread carefully, and then pick it up.

Finally, I wish everyone a prosperous stock market!