Tencent’s robust earnings belie looming regulatory challenges

Iris Deng
·6-min read

Tencent Holdings’ latest financial results showed that China’s most valuable technology company remains a powerful moneymaking machine, but the robust results belied the myriad challenges that the internet giant is facing amid Beijing’s regulatory scrutiny.

Analysts said worries about harsher government oversight are clouding the company’s shiny earnings even after Tencent confirmed on Wednesday that founder Pony Ma Huateng had volunteered a meeting with antitrust authorities to discuss “a broad range of topics”.

“Tencent has telegraphed its intentions to work proactively with regulators,” said Michael Norris, a research and strategy manager at Shanghai-based consultancy AgencyChina.

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“Tencent’s communications to the market, especially surrounding the most sensitive parts of its business – such as gaming and microloans – have been clear and consistent. But it’s too early to say whether this approach will work in Tencent’s favour. The direction and trajectory of regulatory scrutiny has everyone looking a little flat-footed.”

Share price of the Shenzhen-based company slid 2.8 per cent to close at HK$606 in Hong Kong Thursday, marking an over 20 per cent decline from its peak two months earlier.

People walk past a Tencent sign at the company headquarters in Shenzhen, Guangdong province, China, on August 7, 2020. Photo: Reuters
People walk past a Tencent sign at the company headquarters in Shenzhen, Guangdong province, China, on August 7, 2020. Photo: Reuters

Tencent, which runs the world’s largest video games business by revenue and China’s biggest social media operation, published its latest financial results on Wednesday, highlighting its progress in addressing concerns such as teen addition to games while remaining vague on areas such as fintech.

For the first time, the company revealed how much money it made from gamers aged under 16, who accounted for 3.2 per cent of its online game revenue in China. The company has been defending long-standing complaints from parents and authorities, who accuse it of profiting off China’s younger generation. During the country’s “two sessions” political meeting earlier this month, president Xi Jinping expressed concerns over how gaming addiction may hurt Chinese youth.

“Tencent’s additional disclosures are designed to assuage regulators and investors that Tencent’s gaming business isn’t built on minors’ gaming activity,” said AgencyChina’s Norris.

The company, meanwhile, refrained from disclosing the revenue and profit generated by its fintech operations. The company bundled the segment together with “business services”, which generated 38.5 billion yuan (US$5.89 billion) in revenue last quarter – comprising about 29 per cent of its total revenue last year.

In many ways, Tencent’s fintech business mirrors that of Ant Group, the financial services affiliate of Alibaba Group Holding, which owns the South China Morning Post. Tencent’s WeChat Pay, which has 900 million monthly users and a billion daily transactions last year, is one of the country’s top two mobile payment services along with Ant’s Alipay.

Tencent also operates Licaitong, a wealth management platform, which manages more than 1 trillion yuan in aggregated customer assets. It also runs an online credit service called WeiLiDai through its digital bank affiliate WeBank, as well as an insurance platform called WeSure.

Ant is currently working to rectify its business practices in accordance with targets set by financial officials after regulatory changes abruptly foiled its initial public offering in November.

While Chinese regulators have yet to announce any concrete actions against Tencent’s fintech operations, authorities have signalled their readiness to strengthen antitrust enforcement and prevent the “disorderly expansion of capital”. A meeting chaired by Xi last week concluded that all financial activities must be governed by regulations, a strong hint that Beijing is prepared to enhance its oversight on fintech.

Any restructuring of Tencent’s fintech business could have “profound implications on Tencent’s fintech operation and structure over the mid- to longer-term”, wrote JP Morgan analyst Alex Yao in a pre-earnings research report. Yao indicated that Tencent may find it harder to seek a balance between user experience and fintech development.

Tencent president Martin Lau Chi-ping, however, played down the possible repercussions of a potential restructuring, saying that the creation of a financial holding group would be “just about changing the organisation structure, and it has no big impact on business”.

Lau said that Tencent has been doing well in compliance and risk control of its fintech products, and that the business has been growing in a healthy and continuous manner. China’s new financial regulations – which include a 30 per cent capital requirement for online credit, an online credit cap of 200,000 yuan and a ban on lending to university students – will have limited impact on Tencent because the company already meets those standards, he said.

Ant, Tencent urge investors to stay calm amid choppy stock market

“Compliance” was a key word during Tencent management’s post-earnings conference call with analysts and reporters on Wednesday.

“It’s important for us to understand more about what the government and the society is concerned about, and be more compliant even with a futuristic approach … in anticipation of any within regulations change,” Lau said.

While Tencent reported a 175 per cent rise in profit for the final quarter of 2020, beating market estimates, the company’s focus on risk management “threatens to grind its growth gears as the company tiptoes through a hair-trigger regulatory landscape fraught with potential hazards,” Bloomberg Intelligence analyst Vey-Sern Ling wrote in a note on Wednesday.

In a recent case, Zhang Feng, a former employee of Tencent, was detained by Chinese authorities in relation to the corruption investigation against Sun Lijun, a former vice-minister at the Ministry of Public Security, according to a report by The Wall Street Journal in February. Tencent said the former employee was detained on his personal wrongdoings.

Like many other Chinese internet firms, Tencent has tried to play to China’s national strategy to earn the trust of authorities. It has actively promoted investment plans that align with Beijing’s national goal of achieving technological self-sufficiency and leadership in key tech sectors.

On Wednesday, Lau said the main focus of Tencent’s recent meeting with antitrust regulators was on “creating a healthy environment for innovation to happen in China”.

In a bid to position itself as a tech innovator, Tencent said last year that it earmarked 500 billion yuan to spend on “new infrastructure” and “industrial internet”. In a report last week, the company said more than two-thirds of the company’s employees worked on research and development in 2020.


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