Tencent Holdings has lost its title as China’s biggest company to liquor giant Kweichow Moutai, the latest sign of how far regulatory risk and dimming growth prospects has set back the country’s technology industry.

Shares of the online gaming company have tumbled 64% in Hong Kong since a January 2021 peak, wiping US$623-billion off its market value. That’s more than any other firm globally, driven by concerns about Tencent’s outlook after Beijing’s yearlong regulatory crackdown. As of the Hong Kong close on Friday, the company was valued at about $5.4-billion less than Moutai.

The fall of Tencent — which in early 2021 was on the verge of becoming Asia’s second trillion-dollar firm — reflects the many risks facing the sector. Beijing’s overhaul of gaming companies coupled with the nation’s slowing economic growth remain the biggest hurdles for a recovery.

“There are no positive catalysts for Tencent in the second half, since its earnings will continue to be under pressure from the weak macro environment,” said Kenny Wen, head of investment research at KGI Asia. “And even when that improves in China, we are in an era of monetary tightening, so it will be hard to climb back to where it was when central banks were easing.”

Moutai, on the other hand, sells the potent baijiu liquor drunk at banquets and other special occasions, and Beijing has pledged policy support for consumer-driven sectors.

For Tencent, there are challenges on all sides. A slow drip for new gaming approvals as well as limits on playing time for minors has continued to affect its bottom line. Beijing’s strict Covid-zero policy and sporadic lockdowns have damped economic growth and hit advertising revenues. A broader selloff driven by fears of aggressive US central bank tightening is also weighing on shares.

Sold

Those challenges haven’t gone unnoticed among active long-only funds, according to Morgan Stanley. The brokerage said that investors have net sold about $30-billion worth of the company’s shares this year through to 20 September, the most of any firm in its cohort, with the pace having accelerated recently. Tencent’s controlling holders are selling, too.

Last month, the brokerage also lowered its earnings estimates, saying slower gaming growth and “limited visibility” on an advertising recovery could weigh on top-line growth in the third quarter, according to a note by analysts including Gary Yu.

While the story is predominantly one of Tencent’s slide, Moutai’s stock has maintained some resilience this year. The stock has slid 8.7% in 2022, outperforming the broader CSI 300 Index by 14 percentage points. The company is on track to beat its 2022 sales growth targets and could be a beneficiary of any consumer discretionary rebound should China ease its Covid-19 restrictions.

Read: Tencent buybacks fail to stem stock rout – and Prosus is to blame

Investors are now divided on the outlook for Tencent. According to Jian Shi Cortesi, investment director at GAM Investment Management, the stock is “cheaply valued” and policy risks have already peaked. But others are not convinced by that argument, citing that prospects for future profitability look limited.

Read: Tencent reports first-ever sales decline

“When an industry needs to rely on cutting cost to maintain margins, it means they are in the late period of their mature phase. Tencent is a typical example,” said Sun Jianbo, president at China Vision Capital. “None of its monetisation methods has proved to be meaningful revenue drivers. I’m not considering buying even now that the valuation looks cheap.” — Jeanny Yu, (c) 2022 Bloomberg LP