"Major Banks" Citigroup: The sell-off of Chinese online gaming stocks is unreasonable, reiterates "Buy" rating for Tencent and others

Citi published a research report stating that yesterday (the 3rd), Chinese online gaming stocks were sold off, as the market speculated that the volatility was due to the possibility of an increase in value-added tax (VAT) on online gaming revenue, similar to telecommunications services. However, the bank believes that this speculation is unreasonable and lacks basis.

The new "Value-Added Tax Law" was promulgated on December 25, 2024, and will take effect on January 1 of this year, which involves redefining taxable transactions for sales of services and intangible assets. Several telecommunications services have been reclassified into different VAT brackets, resulting in an adjustment of VAT from 6% to 9%. Telecommunications company stock prices fell in response on Monday (the 2nd).

Citi believes that the current market concerns about an increase in the VAT rate for online gaming are based on a faulty analogy to the telecommunications industry case. According to documents from the State Administration of Taxation, the applicable VAT rate for the sale of intangible assets (including virtual items in online games) should be 6%, which is not the same as the tax rate adjustment for telecommunications services. Therefore, there is no basis for an increase, and the related sell-off is unreasonable; instead, the bank views it as a better buying opportunity.

The bank reiterated its "Buy" ratings for Tencent (00700.HK), NetEase (NTES.US), and CENTURY HUATONG (006202.SZ), with target prices of HKD 783, USD 161, and RMB 24, respectively