Tencent’s shares rose as much as 3.4% in Hong Kong after executives told investors they were confident of adjusting their business to remain compliant with whatever regulators had in store for the industry. But they were down about 10% in the week to Wednesday’s close, and still about 40% off their January peak.
“In the near future, more regulations should be coming,” President Martin Lau told analysts. “This should be expected because the regulation has been quite loose over an industry like the internet, considering its size and the importance.”
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 Group Holding Ltd. 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.
In response, Tencent has joined several of its peers in ramping up philanthropy, answering Xi’s call to redistribute wealth and lift the populace from poverty. Late on Wednesday, the company announced it was doubling its initial outlay for charity projects to more than $15 billion, plowing the new tranche into areas including healthcare, education, and rural development.
Some investors have worried that the growing largesse might hurt margins. Tencent reported a net income of 42.6 billion yuan in the 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.
There was at least one positive sign for the company’s financial outlook. Asked about the possibility that Beijing will begin removing preferential taxes for key tech enterprises, executives said Tencent’s effective tax rate should remain stable over the rest of 2021.
“Tencent management noted that there was ‘a lot more to come’ on the regulation front across multiple segments from different regulators. This is clearly not ideal,” Bernstein analyst Robin Zhu wrote. “But more positively, management expressed confidence that the company could remain fully compliant – while staying the course on long-term strategy and monetisation, and ensuring a stable long-term earnings profile.”
Read more: Tencent Analysts See Firm Steering Crackdown Better Than Peers
What Bloomberg Intelligence Says
Negative regulatory headwinds will likely continue to buffet Tencent even after its 2Q results were mostly in-line with consensus expectations. The crackdown by the Chinese government may lead to structurally slower long-term growth and higher costs to cope with compliance with new rules, and management’s comments on the regulatory environment will be key to quantifying the impact.
– Matthew Kanterman and Tiffany Tam, analysts
Click here for the research.
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.
The sharp reduction in advertising spending by edtech firms will have an impact on Tencent’s earnings in the coming quarters, Lau warned Wednesday.
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.
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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.
Executives on Wednesday reiterated an earlier call for the entire industry to evaluate more restrictions on gaming and spending by minors. The company, which has already reduced daily gaming time for children, said players under 16 accounted for 2.6% of its gross receipts in the second quarter, with those under 12 making up just 0.3%.
“It’s a complicated issue requiring the consensus of regulators as well as the industry, it also requires a system to police it,” Lau said. “But from the practicality perspective, it’s actually doable.”
While the contribution from minors is fairly limited within Tencent’s business, the company is taking additional steps to ensure it’s compliant with regulatory requirements, Daiwa analyst John Choi said after the call. “This is going to be beneficial for Tencent in the long run,” he added.
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.