HONG KONG (BLOOMBERG) – Tencent Holdings warned investors to brace for more regulatory curbs on China’s tech sector, telegraphing that Beijing plans to expand restrictions over its internet giants.
China’s largest company reported its slowest pace of quarterly revenue growth since early 2019, underscoring the impact of crackdowns including on the edtech sector – a major source of ad revenue. The company’s core mobile gaming business cooled as it cut playing time for minors, part of Xi Jinping’s campaign to address social ills and redistribute wealth.
The months-long crackdown has ignited a trillion-dollar selloff in Chinese equities and up-ended industries from education and online commerce to car-sharing. Tencent’s sales rose 20 per cent to 138.3 billion yuan (S$29 billion) for the three months ended June, in line with the 138.2 billion yuan average forecast, after gaming growth decelerated.
Tencent’s shares rose as much as 3.4 per cent in Hong Kong on Thursday (Aug 19) 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 per cent in the week to Wednesday’s close, and still about 40 per cent 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. has prompted China’s most valuable corporation to join arch-foe Alibaba Group Holding 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 Mr 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 US$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.”