Tencent Tries to Bounce Again From $200 Billion Antitrust Slide

Tencent Holdings Ltd. wants to prove that it is best able to weather a storm of antitrust control that wiped about $ 200 billion off the value of the largest Chinese company in just a few months.

Thursday’s results should confirm the resilience of the world’s largest game publishing business as the pandemic recedes, which is now supported by growth in newer areas like fintech and cloud. However, reclaiming the market cap, which it has lost since its peak in January, is difficult to reclaim, precisely at the time when Beijing vested Alibaba Group Holding Ltd. and Jack Ma’s Ant Group Co. preceded it before moving on to rising star Meituan.

Tencent has largely escaped hostilities for the time being – despite its ubiquitous WeChat app, which offers unparalleled insights into virtually every facet of Chinese life and an overwhelming share of the gaming, music, and social media markets. However, questions remain about the possible consequences of a campaign aimed at curbing the influence of Chinese internet companies and, similar to the West, exposing alleged abuse of power.

A good set of results should go a long way towards reassuring investors. The Shenzhen-based company is expected to see sales growth of 24% in March thanks to strong recovery from payments and cloud services, while games and other content continue to engage users. Nearly 96% of analysts who track Bloomberg’s stock rated it Buy or its equivalent. This is the highest rate since the Beijing antitrust campaign began in November.

“Unless there are regulatory concerns, Tencent is very attractive in terms of valuation,” said Julia Pan, a Shanghai-based analyst at UOB Kay Hian. “It’s a defensive game in the tech space as they don’t have to burn money on their core businesses like Alibaba and Meituan.”

Here are a few things to consider when Tencent reports profits after the bell in Hong Kong.

The elephant in the room

While Xi Jinping’s government has yet to single out Tencent in its antitrust law, investors haven’t fully ruled out the potential impact on Pony Ma’s sprawling online empire.

Competitors like TikTok owner ByteDance Ltd. argue that WeChat locks users into its ecosystem by blocking links to external services. Tencent portfolio companies like Shixianghui and Yuanfudao have been fined for unfair pricing tactics and other anti-competitive behavior. The music spin-off is being scrutinized more closely at exclusive record label stores. And perhaps most alarmingly, Tencent’s fintech arm – the closest analog to Ant in China – is next up for increased surveillance.

Executives are likely to try again to reassure investors. The company has always been cautious about fintech regulations and will stick to its normal practice of acquiring minority stakes in startups. “Compliance is our lifeline,” Tencent President Martin Lau told investors in March.

But Beijing’s test could still show in Tencent’s bottom line. Ad sales could take a hit if online tutoring startups – big marketers in China – decide to call them down to stay on Beijing’s good side. A prudent approach to fintech could also mean that growth shifts to vanilla payments rather than the more lucrative wealth management and lending businesses. Currently, Tencent’s fintech and cloud businesses are expected to grow 41% in the March quarter – the fastest in eight quarters – from a low a year ago when Covid-19 hit the market.

That evergreen cash cow

When China was banned in early 2020, online gaming became one of the biggest beneficiaries of a boom in home entertainment. As a result, Tencent faces a difficult year-over-year comparison this time around: the bread-and-butter business is projected to see slower sales growth of 16%. Despite formidable challengers like miHoYo’s Genshin Impact, major games like Honor of Kings and PUBG Mobile top the charts for global player spending.

Tencent announced a pipeline of more than 40 new titles during its annual game show on Sunday. After a year of slicing at least 31 game companies around the world, efforts are now being made to produce new mobile hits based on familiar content, including the Japanese manga series One Piece and Digimon.

“Tencent continues to face stiff competition from major technology companies like ByteDance and Alibaba, as well as midsize companies like Lilith Games and miHoYo, but there is no imminent risk of losing its market leadership position,” wrote game research firm Niko Partners in a May 16 note.

Hard comparison

Tencent’s gaming revenue growth is likely to slow from a Covid high to 16%

Source: Bloomberg

horse race

In the longer term, investors should also watch out for competition.

Tencent is famous for its unforgiving culture of internal competition – often compared to horse racing for its fast and challenging nature – in which competing teams compete to develop similar products until you win. But it finally breaks down some inner walls in order to be able to fight better from the outside.

The social giant merged its mini video app, video streaming platform, and mobile store into a single business unit in a rare reorganization last month. Ross Liang, the former head of the QQ Social App, took over the position of the new CEO of Tencent Music Entertainment Group a year after a similar leadership Reshuffle on his literary arm.

All of this underscores Tencent’s efforts to pool resources to build a Walt Disney Co.-style franchise and regain lost ground from rivals like ByteDance, whose addicting apps have been lost to user-screen time and ad dollars. For one, the developers of Tencent’s music apps will be releasing short clips about WeChat’s fast-growing video accounts as the internal platforms work more closely together, Liang said in a post-earnings call Tuesday.

The competition is also fierce in cloud services. The pandemic disrupted IT projects, but the pace should have accelerated in the last quarter as the world’s second largest economy rebounded. Tencent aims to make up the lost ground in 2021. Huawei Technologies Co. overtook Tencent last year and is China’s second largest cloud infrastructure provider, according to Gartner’s study, with a market share of 16.3% compared to 35.1% for Alibaba.

Post-Covid rebound

Tencent’s fintech and cloud entities are expected to grow the fastest in eight quarters

Source: Bloomberg

– With the support of Zheping Huang, Amanda Wang and Jeanny Yu

Before it’s here, it’s in the Bloomberg Terminal.


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