A hot new online game is refuelling investor optimism for Tencent Holdings Ltd, driving China’s biggest stock boost of 2024.

Its shares have rallied 28% so far this year with help from the strong debut of Dungeon & Fighter Mobile, adding US$91 billion in market value, more than any other Chinese company. Improved regulatory and business climates in the company’s key markets are also helping drive expectations.

Analysts' target prices have risen to the highest level in two years, while earnings estimates have jumped more than 14% since the start of the year to a record high. Options traders are turning more bullish as well, with the put-to-call ratio falling from a recent high after the launch of DnF Mobile in late May.

“Capital inflows will go to Tencent first,” said Vey-Sern Ling, the managing director of Union Bancaire Privee. The stock is rising on a “more positive outlook, as its game segment has returned to growth, and its advertising business is taking market share”.

Tencent is among the best performers in the global game sector this year, with its Hong Kong-listed shares outpacing gains in peers from NetEase Inc to Nintendo Co. It has also regained its position as Asia’s second-largest stock, now behind only Taiwan Semiconductor Manufacturing Co (TSMC).

DnF Mobile has secured the top spot in China’s game app ranks since its debut, spurring hopes Tencent may have found its next blockbuster. Expectations are also high for the company’s Honour of Fight due later this year as well as Squad Busters, the first new game in five years from its Finnish unit Supercell Oy.

“Given current data points, we believe it is reasonable to conclude DnF Mobile will be China’s biggest new game launch in 2024 and Tencent’s most commercially successful new game in the past five years,” Goldman Sachs Group Inc analysts Ronald Keung and Lincoln Kong wrote in a note. The broker has raised its target price for Tencent by 17% since April.

Amid Beijing’s broad efforts to support markets and businesses, its approval of DnF Mobile in February signalled an easier stance on the game industry following previous tightening. While China’s economy is still struggling, Tencent’s latest results beat expectations as short-form videos helped drive its online ad business.

The games business may see a margin boost after Tencent’s surprise move to pull DnF Mobile from Chinese Android app stores following complaints of high fees. Meanwhile, Huawei Technologies Co is said to be considering commissions of 20% on its Harmony mobile operating system, much lower than the industry standard.

“There is a high likelihood that other Android app stores like Oppo and Xiaomi that are charging 50% will lower to 30%,” said Morningstar Inc senior equity analyst Ivan Su. The consensus seems to have improved on China’s game industry, given the strong pipeline and the government’s “softer regulatory approach”, he added.

  - Bloomberg