Can Tencents share price bounce back after regulator scraps merger?
T he Tencent [0700.HK] share price was volatile last week as it looked like Chinas antitrust regulator would scrap Huyas [HUYA.N] proposed merger with Douyu. The deal would have seen Tencent dominate the videogame streaming market in China. That decision was confirmed on 10 July (Saturday), when the State Administration for Market Regulation formally blocked the merger on antitrust grounds. If Huya and Douyu merged, that would further strengthen Tencents dominant position in the video game live-streaming market, the regulator said in a statement. This has the effect of eliminating or restricting competition, is not conducive to fair market competition. It is not conducive to the healthy and sustainable development of the online gaming and video game live streaming market.  Unsurprisingly, the Tencent share price has plummeted as talk of the merger failing gathered pace last week  the question is whether there are further falls in store for the stock, or if the regulators involvement has already been factored in. This has the effect of eliminating or restricting competition, is not conducive to fair market competition. It is not conducive to the healthy and sustainable development of the online gaming and video game live streaming market - State Administration for Market Regulation  Why the Tencent share price took a hit  Huya and Douyu are Chinas two biggest video game streaming sites. Tencent is Huyas biggest stakeholder with a 39.5% stake in the firm and is Douyus third-biggest stakeholder. Combined, the streaming companies have a $6bn market value. A merged company would have 300 million users (not including overlapping users) and represent more than 80% of the market, according to Variety. Tencent would have had 67.5% voting control of the combined company. The Tencent share price did manage to claw back some losses on Friday, closing at HK$538.50, having started the day at HK$525. That might seem like small potatoes considering the stock had started the week at HK$571. However, with the regulator confirming it was blocking the merger over the weekend, the stock could see more volatility in the upcoming weeks. Whats happening with the Tencent share price is indicative of Beijings increasing scrutiny on Chinese tech companies. In the past, Chinas tech sector experienced huge growth, benefiting from a loose regulatory setup. Now Beijing is reminding its tech giants whos really in charge. The latest twist happened over the weekend when Beijing added an additional layer of oversight for companies applying for IPOs. Any China tech company that processes personal data of at least 1 million people must now apply for a review by Chinas cybersecurity office. $831billion Valuation wiped off Chinese tech stocks so far in 2021  So far this year, a whopping $831bn has been wiped off Chinese tech stocks, according to Bloomberg. Paul Pong, a managing director at Pegasus Fund Managers, told Bloomberg that the selling will continue in the third-quarter as the authorities continue to announce measures. The South China Post reports that the Hang Seng Tech Index has lost $600bn since February and is probably looking at a further 8% drop before the pressure eases, according to the investment unit of China Construction Bank (CCB). In a note to clients, Cliff Zhao and Lynn Song forecast that the index  which contains many of Chinas biggest tech names  could fall to the 6800 level in the second half of this year, with the analysts saying: a pullback was only a matter of time. Headwinds for Chinas Hang Seng  which briefly entered bear market territory at the end of last week  include the strength of the US dollar and a slowdown in recovery. The fallout from ride-hailing service Didis [DIDI] IPO has been the starkest example so far of Beijing flexing its regulatory muscle. After Didi raised $4.4bn in the largest US IPO of the year, the Chinese cybersecurity regulator dived in to order the company to stop adding new users to the service and ordered app store providers to take Didi down. Unsurprisingly, Didis share price tanked as a result. This follows Beijing terminating the blockbuster Ant Group IPO last year and ordering its biggest tech companies to comply with anti-monopoly laws or face severe punishment. In case the market sentiment goes into extreme pessimism and we see the Hang Seng Tech Index down 20% from here, it could be a rare opportunity to buy some fast-growing Chinese internet companies at extremely attractive prices - Jian Shi  The impact is being felt on the China tech investment theme, which is down 2.91% over the past month (as of 11 Julys close), according to our thematic screener. Still, the recent drops could represent some attractive valuations on China tech stocks. In case the market sentiment goes into extreme pessimism and we see the Hang Seng Tech Index down 20% from here, it could be a rare opportunity to buy some fast-growing Chinese internet companies at extremely attractive prices, GAMs Jian Shi told Bloomberg. Investors will have to weigh up whether the Tencent share price is worth the risk. With regulatory intervention coming seemingly out of the blue, investing in Chinas tech sector is certainly not without risk.