Tencent Is Ready to Back Its Biggest Investment Yet
While most famous for its WeChat messenger and booming online games business, almost half its profit last quarter came from upward revaluations of its vast collection of stakes in other companies. It needed the boost. Earnings from its core division climbed just 9.2% while advertising gross profit grew a mere 17%.
That’s because Tencent’s bread-and-butter businesses are under fire on multiple fronts. Earlier this month state media labeled online games “spiritual opium,” adding to criticism that’s been meted out over the past year against after-school education, targeted advertising and monopoly powers. As if to highlight the point, just as the company released its earnings Wednesday evening China’s Ministry of Industry and Information Technology put out a statement naming Tencent apps among 43 that were in contravention of data privacy rules. Appliance retailer Suning.com Co. and video service iQiyi Inc. were also cited.
This backlash has pushed the company to take corrective action. Earlier in August it implemented time and spending limits on minors playing its games, including restrictions that go beyond regulatory requirements. Its corporate benevolence doesn’t stop there. It has proposed an industry-wide discussion to consider completely banning children under 12 from online gaming and has stepped up efforts to crack down on identity fraud to avoid kids slipping past age controls.
It’s been here before. Three years ago Tencent and rival NetEase Inc. were among companies hit by a halt in approval of new games — each title needs regulatory sign-off — which hurt revenue and earnings. When the ban was eased, they returned suitably humble and far more patriotic. Among Tencent’s new offerings: “Homeland Dream,” developed with the state-run People’s Daily newspaper and populated with communist slogans.
It’ll take a lot more than patriotism for Tencent and its rivals to rebound from the current troubles. This crackdown is broad and deep, encompassing Beijing’s concerns over children’s education, data privacy, advertising, information flows, and monopoly powers in transport, payments and commerce.
Happily complying with regulations for the greater good has become a mantra for Chinese businesses. In March, Tencent explained that Beijing’s new rules for fintech — including curbs on loans and interest rates — would likely hurt its bottom line, but were a way to make the industry healthier and more sustainable. Two weeks ago, Alibaba Group Holding Ltd. said it was plowing “excess profits” into various aspects of its e-commerce business to assist merchants and consumers, even though that would result in real damage to its income.
In its earnings statement, Tencent highlighted its own moves to help small business and public services as a way to contribute to the real economy and society. Having taken a hit on its lucrative fintech operations, proactively restricting its games sales, and focusing its business services unit to help the broader community, Tencent understands the importance of being a good corporate citizen.
When the clouds do finally clear, Tencent is betting that the financial costs of this proactive obedience will allow it to reap the ultimate dividend of remaining in Beijing’s good graces.
Tencent lists fair value of our stakes in listed investee companies at 1,445,978 million yuan as of 30 June 2021.
Value-added services from online and PC games.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.
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