Business Maverick

Business Maverick

Tencent Joins Alibaba in Spending Spree as Competition Grows

The Tencent Holdings WeChat app is displayed in the App Store on a smartphone in Arlington, Virginia on Friday, 7 August 2020. (Photo: Andrew Harrer/Bloomberg)

Tencent Holdings Ltd. pledged to sharply increase investments this year after posting a 25% gain in quarterly revenue, joining its biggest rivals in a spending binge that will jack up competition in China’s post-pandemic internet arena.

China’s largest tech corporations are vying to entice users in the fast-growing arenas of online commerce and video. Tencent plans to plow a larger portion of its incremental profits this year into cloud services, games and video content, joining Alibaba Group Holding Ltd. and Meituan in telegraphing sharp hikes in investment. Tencent is trying to sustain growth in revenue, which climbed to 135.3 billion yuan ($21 billion) in the three months ended March. But its shares slid more than 3% in Hong Kong on concerns about margin erosion, which prompted brokerage CICC to trim its earnings estimate.

The increased spending comes as Tencent faces competition from the likes of ByteDance Ltd. and growing scrutiny from Beijing. Pony Ma’s company has largely escaped the antitrust crackdown for now — despite its ubiquitous WeChat app offering unrivaled insights into all aspects of Chinese life and a commanding lead in gaming, music and social media markets. But its fintech arm, alongside those of other giants such as Didi and Meituan, faces wide-ranging restrictions similar to the ones imposed upon Jack Ma’s Ant Group Co.

Executives sought to assuage investor concerns, reiterating that Tencent remains very focused on risk management and has been “self-restrained” on the size of its non-payment financial products. “When we look into the internal review, and when we look into what other things that need to be done in order to make sure that we are compliant with the spirit of the regulators, it’s actually relatively manageable,” President Martin Lau told analysts on a conference call Thursday.

The company also reiterated earlier-disclosed plans to invest 50 billion yuan in its so-called social values initiative, where it will fund philanthropic efforts in areas such as education, rural revitalization and carbon neutral — areas that align firmly with Chinese President Xi Jinping’s priorities.

What Bloomberg Intelligence Says

The decision to ramp up investment is mainly driven by broadening market opportunities observed in business services, online games and short-form videos. There are also competitive pressures from industry peers who are spending aggressively. While near-term costs will increase, the timing of returns from these investments may be unpredictable.

– Vey-Sern Ling and Tiffany Tam, analysts

Click here for the research.

For a live blog on Tencent’s earnings, click here.

Tencent had tumbled from its January peak amid a broader tech selloff

The Chinese giant had shed roughly $200 billion in market value since its January peak, part of a broader tech selloff that had investors weighing the potential fallout for the online juggernaut. Apart from fintech, competitors have long argued WeChat — now venturing into short videos and e-commerce — is locking users inside its ecosystem by blocking links to external services. Portfolio startups like Yuanfudao and Shixianghui have been penalized for unfair price tactics and other anti-competitive behaviors. Its music spinoff faces heightened scrutiny over exclusive dealings with record labels.

Net income came in at 47.8 billion yuan in the March quarter, buoyed by 19.5 billion yuan of gains from the value of investments and disposals. Excluding those gains, adjusted net income came in at 33.1 billion yuan, slightly behind estimates.

For now, gaming and social content remain Tencent’s biggest and steadiest cash cows. Online gaming revenue rose 17% during the quarter, helped by mainstay titles like Honor of Kings, PUBG Mobile and Peacekeeper Elite as well as newer games including Moonlight Blade Mobile.

Tough Comparison

The giant announced a pipeline of more than 40 new mobile and PC titles during its annual game showcase Sunday, including those adapted from familiar content like Japanese manga series One Piece and Digimon. Last month the Shenzhen-based company folded its mini-video app, video streaming platform and mobile store into a single business unit, in a bid to pull together resources to build a Marvel-like franchise.

As part of its increased spending this year, the company will step up investments in game development and also provide production and monetization tools to content creators as part of efforts to grow its short-form video content.

Its fintech and cloud division posted its strongest growth ever, with sales surging 47% as demand for financial services rebounded and as projects delayed by the pandemic resumed deployment. To support the growth of its cloud business, Tencent said Thursday it will boost spending in areas such as headcount and infrastructure.

Post-Covid Rebound

Online advertising revenue climbed 23% — the fastest in four quarters — helped by the consolidation of new subsidiary Bitauto and higher demand from the e-commerce, education and the fast-moving consumer goods industries. But the division could take a hit from potential regulatory headwinds in K-12 education as well as delays to its video releases, according to Tencent.

“One class of service providers — online education platforms — might pull in some of their advertising as they face tighter regulatory scrutiny,” said Michael Norris, a senior analyst with Shanghai-based market research firm AgencyChina.


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