Tencent profit halves as crackdown, COVID-19 weigh

99 20/06/2022

China’s Tencent reported on Wednesday that its quarterly profit halved from a year ago and revenues stagnated, blaming cuts in advertising spending by consumer, e-commerce and travel businesses for its worst performance since it went public in 2004.

The operator of the WeChat messaging platform and the world’s largest video game company said ad sales slumped 18 percent in the first quarter ended March 31, following a 13 percent drop in the October-December period.

COVID-19 lockdowns in China have hurt advertiser sentiment, while Tencent’s ad business has also taken a knock from competition from rivals, including TikTok owner ByteDance.

Though the Shenzhen-based company has lost more than half its market value since it peaked in February 2021 following Beijing’s regulatory crackdown to rein in the influence of large internet firms, it remains China’s most valuable company.

In a call with analysts, Tencent President Martin Lau said that Beijing has begun to voice support for tech companies in recent weeks as COVID-19 outbreaks have sapped China’s economic growth momentum. He cited a meeting on Tuesday where Chinese Vice Premier Liu He assured tech firms of the authorities’ support for the sector.

“So you can see that from the senior-most level, there is a pretty clear supportive signal released,” he said, adding it will take time before it will translate into a real impact on the company’s business.

Lau also added that while stricter regulations could become “normal practices”, coronavirus outbreaks had emerged as a bigger challenge.

Tencent profit halves as crackdown, COVID-19 weigh

James Mitchell, Tencent’s chief strategy officer, said that the prolonged COVID-19 lockdown in Shanghai, in particular, had significantly hampered multinational corporations’ advertising budgets as many tended to make their advertising decisions out of the city.

Still, regulatory curbs have hurt many of Tencent’s revenue engines, including video games. After freezing new game licences for eight months, Beijing resumed issuing licences in April. But the latest batch of new licences did not include games from Tencent, which makes much of its money by developing games such as Honor of Kings and Call of Duty Mobile.

China has yet to issue more game licences this month.

Mitchell said he expected big firms like Tencent to receive game licences in the future, but that China will approve fewer games overall going forward. To account for that, Tencent has pivoted to focus on fewer but higher-quality games, and plans to introduce more big-budget games in 2023, he added.

Tencent’s domestic game revenue dropped 1 percent in the first quarter while international game revenue rose 4 percent. With Chinese regulators imposing draconian measures to keep minors from playing video games and curbing aggressive monetization features, Tencent has turned to overseas markets for growth.

Revenue growth in its fintech and business services segment slowed to 10 percent in the first quarter, from 47 percent a year earlier.

Total revenue was 135.5 billion yuan ($20bn) in the quarter, roughly the same as a year earlier, and below analysts’ average 141 billion yuan ($21bn) estimate, according to Refinitiv.

Shawn Yang, Shenzhen-based managing director of Blue Lotus Capital Advisors, said the 51 percent plunge in quarterly profit was particularly concerning.

“I estimated a 17 percent or 18 percent decrease because I had learned that they had executed many cost-cutting measures,” Yang said. “I couldn’t guess that its profit has gotten this bad.”

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