Tencent profit beats expectations even with China’s tech crackdown

by BLOOMBERG

Tencent Holdings Ltd.’s revenue growth barely met expectations after online gaming decelerated, worsening an outlook already clouded by China’s crackdown on its most powerful internet companies.

Sales rose 26% to 133.7 billion yuan ($20.5 billion) in the three months ended December, versus the 133.1 billion yuan average forecast. Net income came in at 59.3 billion yuan, with one-time gains contributing over half its profit. That compared with the 32.9 billion yuan projected.

The results may be overshadowed by the threat of a probe into Tencent’s empire spanning gaming to investments and finance. Regulators are said to be considering forcing the firm to overhaul its promising fintech division in a similar fashion to Jack Ma’s Ant Group Co., while Reuters reported on Wednesday that founder Pony Ma had met with antitrust officials. This month, President Xi Jinping warned he will go after “platform” companies that amass data and market power, a sign that the internet crackdown isn’t limited to Ant and its backer Alibaba Group Holding Ltd.

Tencent shares slipped 0.8% before the earnings Wednesday. The stock has dropped about 19% from its January peak, wiping roughly $180 billion off the valuation of Asia’s biggest company. The company didn’t address the broader crackdown in its earnings statement, apart from pledging to work with regulators on fintech and guard against gaming addiction.

Tencent's fallen behind most of China's largest internet firms in recent months

It’s unclear how far Beijing intends to go in its bid to rein in Tencent and its peers. In the short run, investors will likely focus more on how the world’s largest game publisher could sustain a pandemic-induced entertainment boom, while delving deeper into newer businesses like advertising and payments.

All rely on WeChat, the avenue through which Tencent reaches users and markets products, including its biggest gaming hits like Honor of Kings and PUBG Mobile. Through the mini-program model it championed, WeChat hosted $240 billion worth of transactions for 400 million daily users last year. Now a new short-video feed inside the all-purpose platform is tasked with helping the Shenzhen-based company fend off arch-rival ByteDance Ltd., which has been luring eyeballs away with TikTok’s China clone Douyin.

“We expect its game businesses to face less headwinds from antitrust crackdowns than those for its peers,” said Daiwa Capital Markets analysts led by John Choi in a note before the earnings. “Tencent will likely have to adhere to further stringent restrictions on personal data collection and algorithm rules, which would possibly affect its advertising business.”

Revenues from online games grew by 29% in the fourth quarter — the slowest pace in about a year — helped by a surge in international games sales off titles like Peacekeeper Elite and the newly launched Moonlight Blade Mobile. That may spur concerns about the longevity of the pandemic-era global gaming boom.

Sales from social networks climbed 27%, in part after Tencent consolidated contributions from Huya Inc. Online advertising revenues increased 22%.

Fintech and businesses — the division that oversees Tencent’s various money businesses as well as cloud — saw revenue climbed 29%, due primarily to growth in payments and wealth management services. Concerns over whether the pace of expansion can continue have increased after people familiar told Bloomberg News financial regulators are now scrutinizing the unit.

Along with Ant, proposed rules to break up market concentration in digital payments and rein in consumer lending online will damage prospects for Tencent’s WeChat Pay and its wider fintech business. Any diktat to fold those operations into a holding company that could be regulated more like a bank would potentially further curb its ability to lend more and expand as rapidly as it has done in recent years.