The BetaShares ASIA Technology Tigers ETF (ASX: ASIA) exchange-traded fund (ETF) is back in focus on Tuesday after a major announcement from the Chinese government last night.

In a dramatic move, China is opting to ban children from playing online games for more than 3 hours per week. Considering the People's Republic holds the largest population of any country on the planet, as well as one of the highest youth populations, this decision could deal a significant blow to the gaming industry.

Tightening controls around addiction concerns

The hammer has been brought down by the China government to introduce even heavier restrictions on youth gaming overnight. This decision follows reports made earlier in August, dubbing gaming as 'spiritual opium' by the Chinese state media.

Under the new rules, people under the age of 18 will only be allowed to play online games under the tighten time constraints. These new gaming periods are reserved between 8:00 pm and 9:00 pm on Fridays, weekends, and public holidays.

As a result, children will typically be reduced to 3 hours of gaming per week. In comparison, the government's previous allowance was for an hour and a half per day and up to 3 hours on public holidays. In other words, kids will go from 10 and a half hours per week down to 3, as the local government attempts to combat its concerns of gaming addiction. Unfortunately for ASIA ETF investors, some of the impacted companies are featured in the tech-focused investment.

To enforce these restrictions, the government will demand companies utilise real-name verification systems. Gaming companies will not be allowed to provide their services to minors outside of the specified timeframes.

Unsurprisingly, investors of internet and gaming companies with exposure to China have been unsettled by the announcement. At the time of writing, the Tencent Holdings Ltd (HKG: 0700) share price is down 3.3%. Likewise, Chinese PC and mobile games company NetEase Inc (NASDAQ: NTES) is trading 3.5% lower.

ASIA ETF exposure

When it comes to the BetaShares ASIA ETF, 45.5% of the fund's holdings are exposed to China. At the same time, many of these companies are geared towards the internet, gaming, and/or online media sectors. For instance, 17.8% of the fund is in the 'interactive media and services' sector. Meanwhile, 9.5% is allocated to 'interactive home entertainment'.

This is evident when looking at the ETF's top 10 holdings. According to the July fact sheet, the ASIA ETF counted Tencent as its fourth-largest holding at 9.2%. Another familiar face is NetEase, sitting at the tenth spot with a 3.4% weighting.

At the time of writing, the BetaShares Asia Technology Tigers ETF holds $665 million of total assets under management.

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Tencent Holdings Ltd (HKG: 0700) and NetEase Inc (NASDAQ: NTES), China's two largest video game publishers, regularly dominate the country's mobile gaming charts.

Tencent currently publishes four of the ten highest-grossing iOS games in China, according to App Annie, including its top three games: Honor of Kings, Moonlight Blade, and Peacekeeper Elite. Two of NetEase's games, Fantasy Westward Journey and Lutu Zhibin, have cracked the top ten.

However, investors might not have noticed that Alibaba Group Holding Ltd (NYSE: BABA), China's top e-commerce and cloud company, has also been quietly climbing the charts via its gaming subsidiary, Lingxi Interactive.

Romance of the Three Kingdoms: Strategy Edition, which Lingxi launched last year, is now the fourth-highest-grossing iOS game in China -- and puts Alibaba within striking distance of overtaking Tencent's top games. Let's look back at how Alibaba entered the gaming market, and where this oft-overlooked business could be headed.

Why is Alibaba publishing video games?

Alibaba co-founder Jack Ma adamantly opposed investing in video games during his tenure as CEO, which ended in 2013. But in 2014, his successor Jonathan Lu launched Alibaba's first mobile gaming platform.

That same year, Alibaba bought UC Mobile and its gaming platform 9Game, as well as a stake in the American game developer Kabam. But Alibaba's initial gaming efforts -- which included mini games for its Taobao Mobile app and its Laiwang chat app -- couldn't gain any traction against Tencent's WeChat and its massive portfolio of mobile games.

Alibaba's gaming business subsequently stagnated, and Daniel Zhang eventually succeeded Lu as Alibaba's new CEO in 2015. In 2017, Zhang rebooted Alibaba's gaming business by buying EJoy, a gaming company co-founded by NetEase's former chief operating officer Zhan Zhonghui.

That acquisition led to the creation of Lingxi Interactive, Alibaba's dedicated game studio, and Zhan was put in charge of its future gaming projects. Lingxi launched several games, but only started gaining mainstream attention after it launched its first Romance of the Three Kingdoms game last year.

How fast is the gaming division growing?

Alibaba previously incubated Lingxi in its innovation initiatives segment, which mainly included experimental businesses that didn't neatly fit into its core commerce, cloud, and digital media segments.

But in the first quarter of fiscal 2021, which started in April, Alibaba moved Lingxi from the innovation initiatives segment to its digital media and entertainment segment, which also houses its streaming video platform Youku Tudou, its streaming music platform AliMusic, and other businesses.

Alibaba still doesn't disclose Lingxi's revenue separately. But a comparison of its innovation initiatives and digital media segments before and after the transfer in the first quarter strongly suggests the mobile gaming segment is generating at least 1 billion yuan ($152 million) in revenue per quarter:

Source: Alibaba.

Back in September, Alibaba told the South China Morning Post that Romance of the Three Kingdoms: Strategy Edition had generated 3.7 billion yuan ($563 million) in the first half of the calendar year.

Based on those numbers, Lingxi could be on track to generate over $1 billion in annual revenue. That would be a solid milestone, but it would still be tiny compared to Tencent, which generated 41.4 billion yuan ($6.3 billion) in revenue from its online gaming business in the third quarter alone. NetEase's gaming business generated 18.7 billion yuan ($2.7 billion) in revenue last quarter.

$1 billion would also only equal less than 1% of Alibaba's projected annual revenue next year. In short, Alibaba's gaming business won't reduce its dependence on its core commerce and cloud businesses anytime soon.

But its gaming business could keep growing

Lingxi is still a tiny business segment for Alibaba, but the popularity of Romance of the Three Kingdoms: Strategy Edition and its sister title, Romance of the Three Kingdoms: Fantasy Land, could bolster the studio's brand, pave the way for more games, and boost its digital media revenue. Alibaba didn't say anything about Lingxi during last quarter's conference call, but investors should still keep a close eye on this growing business.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Alibaba hasn't given up on this high-growth market appeared first on The Motley Fool Australia.

On Wednesday, the House of Representatives unanimously passed a bill that could result in the delisting of Chinese companies from U.S. stock exchanges. The Holding Foreign Companies Accountable Act (HFCAA) has been sent to President Trump, who is expected to sign the measure later today, which also received unanimous support from the Senate earlier this year. 

The sweeping legislation would require foreign companies to submit to increased accounting disclosures and to certify that they are not owned or controlled by a foreign government. It also includes provisions that the statements be backed up by an audit conducted in accordance with U.S. accounting rules by the Public Company Accounting Oversight Board (PCAOB).

The legislation could result in the delisting of a number of popular Chinese companies from major U.S. exchanges, including e-commerce players Alibaba (NYSE: BABA) and JD.com (NASDAQ: JD), as well as internet search giant Baidu (NASDAQ: BIDU) and electric vehicle (EV) maker NIO (NYSE: NIO).

Just last month, the Securities and Exchange Commission announced it was preparing to adopt tougher rules that could take effect as early as 2022. These requirements lay the groundwork for the delisting of foreign equities when their companies fail to comply with U.S. auditing rules. 

Regulators have long been vexed by the Chinese government's refusal to allow the PCAOB to review audits of Chinese companies listed on U.S. exchanges. Some believe this contributed to the spectacular fall from grace of Luckin Coffee (OTC: LKNC.Y), which flamed out earlier this year following the discovery of massive and widespread fraud. The company was found to have manufactured a significant portion of its 2019 revenue and was subsequently booted from the Nasdaq exchange.  

Numerous companies in China have admitted to contingency plans if the bill is passed. NetEase (NASDAQ: NTES) and JD.com each acknowledged the proposed rules when they announced subsequent listings on the Hong Kong Stock Exchange.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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