Tencent sales grow slowest in two years

Bloomberg

Tencent Holding Ltd.’s revenue increased at its slowest pace since 2019 after China’s expanding tech crackdown hit its mobile gaming empire, overshadowing newer businesses from cloud to social ads.
Beijing’s months-long crackdown has ignited a trillion-dollar selloff in Chinese equities, up-ended online education and also pumped the brakes on growth across a swath of industries from advertising to car-sharing. This month, Alibaba Group Holding reported revenue that missed estimates for the first time in more than two years. Tencent’s sales rose 20% to 138.3 billion yuan ($21.3 billion) for the three months ended June, in line with the 138.2 billion yuan average forecast.
Growing scrutiny from Beijing and stiffening competition with the likes of ByteDance Ltd. has prompted China’s most valuable corporation to join arch-foe Alibaba in a spending spree, plowing a larger chunk of its profit into areas like cloud services, games, and short videos. While Tencent itself isn’t the target of any probe, its outsized influence in the modern Chinese economy has left it vulnerable as the crackdown quickly expanded from antitrust and e-commerce to data security and online content.
Net income was 42.6 billion yuan in quarter, beating the 30.8 billion yuan projected thanks in part to a gain of more than 20 billion yuan on its investments around the world. Shares in the Prosus, Tencent’s major shareholder, rose more than 4%.
Last month, regulators ordered Tencent Music Entertainment Group to relinquish its exclusive licensing deals with label companies, and killed a Tencent-led merger of two rival game streaming platforms.
State media then trained their sights on gaming addiction among China’s youth, spurring Tencent to introduce even-stricter child protections into its mobile titles. And portfolio startups like Yuanfudao and VIPKid may be forced to write down their valuations after Beijing banned tutoring firms teaching school subjects to kids from making profits.
Meanwhile, a recently launched campaign by the tech-industry overseer has reignited scrutiny over Tencent’s ubiquitous WeChat. The messaging, social media and payments service —which temporarily suspended new user registrations last month to undergo security upgrades —has long been criticized for walling off users from services operated by rivals such as Alibaba, one of the watchdog’s key points of contention.
And while President Martin Lau has said the company’s fintech arm remains focused on risk management when expanding into non-payment products, monetisation could be limited if Beijing put one of its fast-growing divisions under scrutiny similar to Jack Ma’s Ant Group Co.
Tencent’s core gaming business increased sales by 12%, the slowest pace since the third quarter of 2019. It faces a tough comparison from a year ago, when it rode an internet boom during the height of the Covid-19 pandemic. That division, which accounted for about half of China’s video game market in 2020, still largely revolves around aging franchises Peacekeeper Elite and Honor of Kings, at a time when up-and-comers like MiHoYo churn out new hits. In a bid to shore up its slate, Tencent has scooped up slices of 76 gaming firms so far this year, most of which are lesser-known indie development studios, according to data tracked by researcher Niko Partners. That compares with just 31 gaming investments last year.
“The Chinese mobile gaming space is witnessing a structural change whereby game developers are more inclined to publish games on their own instead of licensing their titles to third-party publishers such as Tencent,” Nomura analysts including Jialong Shi wrote in a note before the results. “The huge success of some independent game developers such as Lilith Games and MiHoYo in publishing their self-produced titles have likely inspired other small developers to follow suit.”
Online advertising revenue increased 23%, as internet services and consumer staples clients outweighed a drop in education-related spending. Fintech and other business services climbed 40%, reflecting increasing digital payment transactions, the company said.