China Internet_ Our Thoughts on a Potential Probe into iOS Channel Fee in China

Summary of Conference Call on Potential Probe into iOS Channel Fee in China Industry and Companies Involved - Industry: China Internet - Companies: Tencent, NetEase Core Points and Arguments 1. Potential Probe Announcement: A report from Bloomberg indicates that China is considering a probe into iOS App Store practices, specifically the 30% channel fee and restrictions on third-party stores and payments. This follows a similar probe in Europe where Apple was required to reduce its channel fee from 30% to 17% and allow third-party marketplaces and payment options starting March 2024 [2][3][4] 2. Impact on Tencent: - Assuming a 40/60 mix of iOS/Android for Tencent's domestic mobile games, a reduction of 13 percentage points (ppt) in the iOS channel fee could result in approximately 160 basis points (bps) increase in Value-Added Services (VAS) margin and a 2% increase in non-IFRS Earnings Per Share (EPS) [3] - If Android follows with a 23ppt reduction in channel fees (from ~40% to 17%), it could lead to a 600bps VAS margin upside or a 7% increase in non-IFRS EPS [3] 3. Impact on NetEase: - For NetEase, with a similar 40/60 iOS/Android mix and 50% of Android revenue from self-channels, a reduction to a 17% iOS channel fee could yield a 350bps increase in game gross margin or a 7% increase in non-GAAP EPS [4] - If Android also sees a 23ppt reduction, it could result in an 810bps game margin upside or a 16% increase in non-GAAP EPS [4] Other Important Content - Market Context: The potential changes in channel fees could significantly benefit major gaming companies in China, particularly Tencent and NetEase, by improving their profit margins and earnings [1][3][4] - Analyst Insights: The analysis suggests that the outcome of the probe could mirror the European situation, which would be favorable for the companies involved [1][2] This summary encapsulates the key insights from the conference call regarding the potential regulatory changes affecting the iOS channel fees in China and their implications for Tencent and NetEase.