Tencent declares ‘reckless’ tech era over as reservoirs of growth
(Bloomberg) – Tencent Holdings Ltd. pledged to embrace China’s new paradigm of tighter government oversight after reporting its slowest growth ever, declaring the end of an era that has nurtured some of the world’s largest and most profitable companies .
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Co-founder Pony Ma and Chairman Martin Lau led executives to endorse Beijing’s year-long crackdown on Big Tech. They pointed out that this reflected a backlash against the enormous power of internet giants around the world and argued that increased regulation would lead to healthier long-term growth.
Tencent joins Alibaba Group Holding Ltd. and other rivals to recognize a new phase of cautious expansion, more than a year after the start of a deadly crackdown that eventually engulfed all internet spheres, from e-commerce to online gaming and education.
Tencent followed Alibaba in reporting its slowest pace of quarterly growth on record as online advertising sales missed analysts’ forecasts after declining for the first time. And domestic gaming revenue was up just 1% – reflecting a months-long licensing halt that, along with restrictions on playing time for minors, undermined Tencent’s biggest division.
“We are proactively embracing changes to better align with the new industry paradigm,” Lau said on a conference call after the results. “We have a long-term oriented corporate culture that focuses on user value, social responsibility, technological innovations and compliance, the key elements for sustainable and healthy growth.”
The company also brushed off speculation that it would embark on a stock buyback program as Alibaba announced this week, saying it would instead focus on core businesses such as international gaming, cloud services and its messaging service WeChat, developing new games for its pipeline when the regulatory environment stabilizes later in 2022.
Shares of Tencent slid more than 4% in Hong Kong while Naspers Ltd., its largest outside shareholder, closed down more than 9%.
“The fact that Tencent has levers it can pull to improve monetization while remaining in ‘hidden and flop’ mode has raised questions about ‘execution paralysis’ as regulatory discussions (e.g., the fintech) continue in the background,” Bernstein analysts led by Robin Zhu wrote in a post-earnings report. “These results will lead to another round of earnings cuts and, in the absence of more proactive guidance from management, we doubt investors will feel the need to get involved.”
Tencent Slides; More pressure on advertising sales: Street Wrap
Revenue rose just 8% to 144.2 billion yuan ($22.6 billion) in the quarter from an average forecast of 145.3 billion yuan – the first time quarterly sales rose to one digit. Net income reached 95 billion yuan, beating the projected 31.5 billion yuan, but only due to a large one-time gain. Still, non-IFRS earnings fell 25%, worse than expected, and gross margins shrank amid international expansion.
Read more: Alibaba predicts new normal of low growth as crackdown intensifies
Tencent has lost more than $470 billion since its peak in 2021, although it has largely escaped direct scrutiny from Beijing. The company carefully endorsed the government’s efforts, saying it was best in the long run to rein in past excesses that led to messy competition in areas such as carpooling, e-commerce and food delivery. Alibaba and Meituan were two of the largest companies fined for monopolistic practices over the past year.
“For several years, industry players have over-emphasized zero-sum competition, aggressive marketing, reckless expansion, short-term growth and business benefits, neglecting the most important elements of ‘sustainable growth,’ Lau said. “As a result, industry growth has become frothy and unhealthy.”
Investors are recalibrating their approach to the market after Xi Jinping and his deputy Liu He pledged to support the economy and markets and end a crackdown on the tech sector ‘as soon as possible’ – triggering a historic rally in Chinese stocks last week .
But for Tencent, several unresolved issues remain.
“Macro and regulatory headwinds aside, Tencent has its own challenges,” said Shawn Yang, analyst at Blue Lotus Capital Advisors. “It has yet to create its next game hits, and advertising sales have been affected a lot by ByteDance’s Douyin.”
Regulators are considering requiring Tencent to integrate its WeChat Pay service into a newly created financial holding company, Bloomberg reported last week, as part of an overhaul of its giant fintech arm that could undermine the appeal of all of its social media activities. On Wednesday, Lau said the company remains in talks with regulators over restructuring requirements, adding that Tencent will comply with all regulations.
Read more: China Weighs Tencent Payments Overhaul, New Licensing Requirement
A freeze on new releases in the world’s biggest gaming market is entering its eighth month, rekindling fears of a 2018 crackdown that sent Tencent’s most lucrative business into contraction.
Given the regulatory hurdles at home, Tencent is increasingly looking outward. While scooping up slices of game studios in locations across Europe and Asia, it’s working with Western gaming giants to bring their beloved franchises to mobile – the latest example being Electronic Arts’ Apex Legends. Inc. In December, Tencent launched a new publishing division for global markets, with offices in Singapore and Amsterdam.
The investment arm of Tencent – which in the past has funded the expansion of Meituan and ride-sharing platform Didi Global Inc. – has gone into stealth mode. The company recently reduced its stake in Singapore’s Sea Ltd. and distributed nearly all of its JD.com Inc. stock as a single dividend, prompting speculation that it would exit or sideline similar investments in the industry.
At the center of Tencent’s sprawling online business is still the WeChat messaging platform, used by more than a billion people for everything from a League of Legends purchase to a TikTok-style video stream and meal delivery. Monthly active users on WeChat increased by 3.5% to 1.27 billion during the period. Daily active users of the app’s mini-programs — lightweight, no-download services within the core platform — grew about 12.5% to 450 million in 2021, executives said in January.
Executives stressed that they view the challenges in the domestic game as “temporary” and that the company has a large inventory of titles ready to launch as regulatory uncertainties ease. On Wednesday, Lau said the company expects Beijing to continue handing out new gaming licenses once the industry resolves protections for minors, without giving a timeline.
(Updates with Tencent shares from the sixth paragraph)
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