In ANTYA’s view, it is now an opportune time to place bearish bets on Tencent Holdings (700 HK) not only because of the global macro backdrop, but more importantly due to the notice issued by the Chinese Ministry of Education on August 30, 2018, titled “Implementation Plan for the Prevention and Control of Children and Adolescent’s Myopia”, which could materially dent growth and margins in the Company’s VAS segment, its bread and butter.

We do not have statistics on the prevalence of Myopia amongst the Chinese population, although we do have access to some scholarly journals that discuss the epidemic of Myopia in China. We quote from a reputed study;

In nine population-based studies with up to 560 000 child and adult participants, [the prevalence of myopia was about 80% in 18-year-old school children and 17% in adults aged 40 years and older]. These figures were significantly higher in urban regions than in rural regions (OR 1・63, 95% CI 1・51–1・75, p<0・0001). Myopic retinopathy and myopia-associated glaucoma were the most common causes for irreversible visual loss in adults. In children, the most common myopia-associated modifiable factor was less time spent outdoors/more time spent indoors with studying….. These findings suggest that the increase in prevalence of myopia in the young Chinese generation is associated with lifestyle factors.”

From: Myopia in China: a population-based cross-sectional, histological, and experimental study – October 30.2016 by: Jost B Jonas, Liang Xu, Wen Bin Wei, Ya Xing Wang, Wen Jun Jiang, Hong Sheng Bi, Songhomitra Panda-Jonas .

Document Abstract Attached

We do not pretend to be ophthalmologists or public health experts. Nonetheless, statistically speaking evidence dictates that the 63% difference in the incidence of Myopia in the over 40 and under 18 population is meaningful, and therefore the prescriptive diktats issued by Chinese authorities to influence the lifestyle of young children and younger teens and adults is thoughtful. The notice dated August 30, 2018, was published by the Ministry of Education of the Peoples Republic of China, in collaboration with eight other ministerial groups or departments, implying a coordinated national effort to improve perceived or real shortcomings in the visual health of young Chinese population.

Like everything else in China, to avoid any misunderstandings, the Ministry of Education is rigid and direct in its plan as outlined for comrades across China to implement. We highlight a few of the ideas – the caveat being that we used Google translate to understand the document issued by the Ministry

– to emphasize the urgency with which the authorities are tackling this initiative.

1. Control the use of electronic products – Parents to minimise use of electronic products when accompanying children. The use of electronic products for non-learning purposes should not exceed fifteen minutes and [total] usage should not exceed one hour per day.

2. The completion time of written homework in third to sixth grades shall not exceed 60 minutes, junior high school 90 minutes etc.

3. Strengthen outdoor sports – We will comprehensively implement the sports homework system for students in the winter and summer vacations and supervise and inspect the completion of students.

4. Scientific and rational use of electronic products – It is strictly forbidden for students to bring electronic products such as personal mobile phones and tablet computers into the classroom. In principle, the use of electronic products for teaching [should] not exceed thirty per cent of total teaching time.

5. Vision Monitoring – Under the guidance of the health department, strictly implement the student health examination system twice per semester, remind students of abnormal vision, issue personal exercise prescriptions and health prescriptions, and promptly inform parents to bring students to the eye care institutions for examinations.

We highlighted some of the recommendations to reemphasise that the use of mobile devices and personal computers for online gaming is about to undergo an abrupt change in China. In our view, recent troubles at Tencent Holdings (700 HK) and Netease Inc (Adr) (NTES US), driven by weakness in gaming revenues, could be more structural than transitory in character, and hence in our view these stocks will continue to be under pressure for some time.

An interesting statistic from Statista outlined in Figure 1 provides some

context to the time being spent by Chinese consumers on online games.

Figure 1: China: How many hours per week do you spend playing video/computer games?

Source: ANTYA Investments Inc. and Statista

With the Ministry intending to limit usage of electronic devices to less than an hour a day, including learning related usage, if data from Figure 1 are correct, 50% or more of gamers in China will fall under that category. How many of those are minors is not clear yet, but in the second half of 2018, and subsequently, the YoY growth in the entire online gaming and display advertising industry will slow down meaningfully.

Although Tencent has telegraphed its expectations already, we do not believe that investors have fully grasped the nuance of these developments.

REGULATORS ARE SERIOUS

Going forward a multi-pronged attack on consumption of electronic entertainment content, through education and follow-up, will have a detrimental effect on all players involved. If there ever was any doubt as to the seriousness of the Ministry’s pronouncements then perhaps the following statement that;

The children’s and adolescents Myopia prevention and control work, overall Myopia rate and physical health status are included in the government performance appraisal”, provides some food for thought

Investors need to stress test their assumptions surrounding Tencent. We refrain from discussing numbers here because a good synopsis on numbers by segment has been provided Tencent (700 HK): A Generalist’s Guide . We do not agree with the thesis presented in Reflections on Tencent . We believe there is more downside in Tencent.