Tencent profits soar even as China tech crackdown worries linger
Tencent profits soar even as China tech crackdown worries linger
Tencent is generating more revenue and intends to invest more in games and videos, despite Beijing's increased scrutiny of the technology sector.
The Chinese gaming and social media giant announced Thursday that revenue increased 25% year over year to 135.3 billion yuan (about $21 billion) in the March quarter.
Profit increased 65 percent to 47.8 billion yuan ($7.4 billion), exceeding analysts' expectations, aided by lower interest rates and growth in the company's thriving gaming business.
Likewise, the company announced Thursday that it will increase its investment in "new opportunities," including game development and short-form video content.
According to Hao Hong, head of research at BOCOM International, the securities arm of China's Bank of Communications, this has likely turned off some investors. Tencent's (TCEHY) stock fell as much as 4% in Hong Kong on Friday.
"People are essentially looking for reasons to sell their shares in the company," Hong explained. "There is always some risk associated with new investments, which is why some people may wish to withdraw funds."
Investors may also be concerned that the company will face the same level of scrutiny as some of the country's largest companies, including Alibaba (BABA).
Tencent shares are up 4% year to date, but have fallen 23% from a late January high, as the Chinese government has stepped up its crackdown. However, Hong asserted that regulatory concerns may be exaggerated.
Once hailed as one of China's greatest success stories, Alibaba has devolved into a cautionary tale. It was fined a record $2.8 billion last month for acting monopolistically.
This comes after Alibaba's financial technology subsidiary, Ant Group, was forced to postpone a record-breaking $37 billion initial public offering last year after Ma ran afoul of regulators. Ant was later ordered to significantly overhaul its operations and transform into a central bank-supervised financial holding company.
Tencent has remained in the crosshairs ever since, fraying investors' nerves.
Regulatory concerns
Ma Huateng, also known as Pony Ma, the company's CEO, met with Chinese antitrust officials in March. Tencent stated at the time that the gathering was "voluntary" and "regular," though the company's shares fell that day.
Regulators have continued to tighten practices for dozens of technology companies over the last few weeks.
In April, for example, executives from 34 technology companies, including Tencent, were summoned to meet with authorities, who urged them to heed the Alibaba warning and refrain from anti-competitive behavior.
Tencent was also one of 13 companies ordered by Chinese regulators to address their financial units' most "significant problems" that month. (In addition to owning WeChat, the ubiquitous messaging app, Tencent is well-known in China for its monopoly on online payments via its WeChat Pay platform, which has hundreds of millions of users.)
The move, which signaled Beijing's determination to expand the scope of its historic crackdown, caused Tencent shares to fall once more at the time.
Tencent President Martin Lau addressed the issue during a Thursday analyst call, emphasizing the company's "extreme focus on compliance."
"We place a high premium on risk management. We are extremely self-reliant in terms of the size of [certain] of our financial products, particularly on the lending side "he continued.
"So when we look at the internal review and what needs to be done to ensure compliance with the regulators' spirit, I believe it's actually quite manageable."
Tencent Music (TME), the company's publicly traded music streaming subsidiary in the United States, also stated this week that it has been receiving increased scrutiny from Chinese regulators.
"In recent months, we have been subjected to increased regulatory scrutiny by relevant authorities, and we have been actively cooperating and communicating with them," Chief Strategy Officer Tony Yip said during an earnings call.
"We are committed to complying with all applicable laws and regulations, including antitrust laws."
Video games growth
Analysts were particularly impressed by Tencent's gaming business, which grew at a breakneck pace in 2020 and continues to do so.
Numerous video game publishers have benefited from the pandemic's increased homelessness, and Tencent's revenue from this division likely nearly equaled what it earned "last year during Covid," according to Bernstein analyst Robin Zhu.
Tencent is the world's largest gaming company, best known for PlayerUnknown's Battlegrounds, a popular mobile game (PUBG).
The company reported a 17% increase in revenue from its games division to 43.6 billion yuan ($6.8 billion) from January to March, "primarily due to revenue growth from our mobile games globally, including Honor of Kings, PUBG Mobile, and Peacekeeper Elite, as well as newly launched titles such as Moonlight Blade Mobile."
In general, Zhu stated, "we would argue that this was a strong set of results."
