Nintendo shares surge more than 14% after tie-up with Tencent to sell Switch console in China

Key Points
  • Nintendo has partnered with Tencent to bring the Switch console to China.
  • Nintendo shares surged on the news as investors hope it can work with Tencent to find success in the world's largest gaming market.
  • Analysts cautioned that there are still regulatory hurdles to overcome and that the Switch wouldn't be immediately available.
A person dressed as the Nintendo character Mario waves at a pop-up Nintendo venue in Madison Square Park, March 3, 2017 in New York City.
Drew Angerer | Getty Images

Nintendo shares surged on Friday after Tencent won approval to start selling the Japanese gaming giant's Switch console in China.

At one point, shares were posting a gain of more than 16%, but they were trading at around 14% higher by the end of the day in Tokyo.

Regulators in the southern Chinese province of Guangdong approved the Nintendo Switch and the game "New Super Mario Bros. U Deluxe" to be released in China.

Nintendo shares responded by hitting their highest level since an intra-day high on October 18, 2018.

Investors have been asking for a long time when Nintendo will enter the world's largest gaming market and the tie-up with Tencent will be a welcome step, according to Daniel Ahmad, an analyst at Niko Partners. But, he warned, the market should not get too excited because Nintendo and Tencent will still need approval from more regulators in the country.

"This is still very early in the process. Therefore, we expect there to be some time before the console releases in China," Ahmad said in a note on Thursday.

"Nintendo and Tencent will also need to submit each game for approval in China and ensure the games comply with content regulations. This too is a lengthy process and means that it will take some time before Nintendo can build up a large library of official games in China," he added.

Chinese consumers have typically favored computer and mobile games over consoles. That's because the government only lifted a 14-year ban on consoles in 2014.

While Microsoft and Sony haven't built huge console businesses in China with the Xbox and PlayStation, Nintendo could have a better chance because of its game portfolio and the portable nature of the Switch.

"Nintendo sits on the gaming world's most valuable and unique IP (intellectual property) treasure trove," Serkan Toto, CEO of game industry consultancy Kantan Games, told CNBC.

"The game portfolio is totally different from Sony and Microsoft, which appeal to hardcore gamers — who in China play on the PC. The Switch is a portable device, which fits nicely with Chinese users' penchant for gaming on the go," he added.

Tencent tie-up

As the largest gaming company in China, Tencent could be a strong partner. The Chinese technology giant is responsible for some of China's biggest mobile hits like "Arena of Valor." Investors will be hoping that Nintendo can work with Tencent on a mobile strategy in China.

"Nintendo has yet to launch any of its mobile games in China and we believe that the potential of Nintendo's mobile game business in China is significantly larger than its console business," Ahmad said.

Shares of the Japanese gaming firm have trading fairly flat recently after it slashed its sales outlook for the Switch in February and as new gaming products such as Google Stadia have been announced. Google Stadia is the search giant's game streaming platform.

Friday's share price move means Nintendo stock is up about 36% so far this year.