Tencent played down the impact of Beijing’s heightening scrutiny over China’s biggest internet firms, saying a potential revamp of its $120 billion fintech wing should have little impact on its business. Its shares sank the most in two months.
President Martin Lau acknowledged founder Pony Ma called on regulators recently but said that it was voluntary and part of a series of regular meetings. Executives reiterated that the company has always been cautious and compliant with fintech regulations and it will stick with its normal practice of acquiring minority stakes in Chinese startups, while regulators pore over past deals.
Beijing is widening a crackdown on the country’s largest corporations, fearful of their growing clout after years of relatively unfettered expansion. Regulators are said to be considering forcing the firm to overhaul its promising fintech division in a similar fashion to Jack Ma’s Ant Group Co. This month, President Xi Jinping warned he will go after “platform” companies that amass data and market power, a sign the internet crackdown isn’t limited to Ant and its backer Alibaba Group Holding Ltd.
Tencent’s shares slid more than 5.6% in Hong Kong Thursday, their largest intraday fall in two months, worsening a $180 billion selloff in Asia’s biggest company since its January peak. Technology stocks also declined following a US rout, as regulators revived threats to toss China’s largest corporations off American bourses.
“It was telling that several questions on Tencent’s quarterly call were directed at regulatory risks, and it’s hard to argue against the idea that this could remain an overhang for Tencent’s share price performance,” Bernstein analyst Robin Zhu wrote in a research note. But the fourth-quarter “numbers serve as a reminder that the business remains in very robust shape.”
Lau acknowledged companies like Tencent tread a fine line between public duty and profit motive as they get larger, but the “boring answer” was to remain compliant and stay in touch with the government. Asked whether Tencent’s core gaming and entertainment businesses might attract antitrust regulators’ attention, executives pointed to the sheer number of competitors. That was in contrast with a quarter ago, when they stressed the new antitrust rules focused more on transaction-based platforms than on Tencent’s entertainment businesses.
“We have always been very focused on compliance and we will continue to operate strictly in compliance with the rules and regulations,” Lau told reporters on a conference call. Any requirements to form a financial holding company will not have an impact on its business, he added. “Compliance is our lifeline.”
Tencent’s attempt to allay investor concerns over regulatory scrutiny comes after it posted revenue growth that barely met expectations.
Top executives on Wednesday repeatedly stressed they’ll go all out to comply with regulations. Tencent, which acquired stakes in hundreds of startups over the years, is going over past investments to ensure they comply with antitrust requirements. The operator of WeChat — used by a billion-plus people — pledged again to safeguard user privacy even as it acknowledged the need to heed Beijing’s call to share data on everything from search to e-commerce.
Led by the People’s Bank of China, the government has proposed establishing a joint venture with tech giants that would oversee the lucrative data they collect, which would mark a significant escalation in regulators’ attempts to tighten their grip over the sector, Bloomberg News reported Wednesday.
“Tencent is trying to reassure investors that its microloan business has substantive differences from Ant,” said Michael Norris, research manager at Shanghai-based consultancy AgencyChina. “While Tencent may avoid the same level of scrutiny as Ant Group, there may be some bumps along the road. Potentially issues could include scrutiny of data collection, or regulatory attention toward promotion and cross-sale of financial products,” he added.
Sales rose 26% to 133.7 billion yuan ($20.5 billion) in the three months ended December, versus the 133.1 billion yuan average forecast. Net income came in at 59.3 billion yuan, with one-time gains contributing over half its profit. That compared with the 32.9 billion yuan projected.
It’s unclear how far Beijing intends to go in its bid to rein in Tencent and its peers. In the short run, investors will likely focus more on how the world’s largest game publisher could sustain a pandemic-induced entertainment boom, while delving deeper into newer businesses like advertising and payments. Revenues from online games grew 29% in the fourth quarter — the slowest pace in about a year — despite a surge in sales of titles like Peacekeeper Elite and the newly launched Moonlight Blade Mobile.
All rely on WeChat, the avenue through which Tencent reaches users and markets products, including its biggest gaming hits like Honor of Kings and PUBG Mobile. Through the mini-program model it championed, WeChat hosted $240 billion worth of transactions for 400 million daily users last year. Now it’s relying on a new short-video feed inside the all-purpose platform to fend off ByteDance Ltd., which has been luring eyeballs away with TikTok’s China cousin Douyin.
Sales from social networks climbed 27%, in part after Tencent consolidated contributions from Huya Inc. Online advertising revenues increased 22%.
Fintech and businesses — the division that oversees Tencent’s various money operations as well as cloud — grew revenue 29% thanks to payments and wealth management services. But concerns linger over whether the company can sustain that pace.
China’s largest company faces more scrutiny of its fintech operations as regulators step up supervision of a fledgling but sprawling industry that could pose systemic risks. As one of the largest operators in the sector, Tencent’s businesses face the same stringent measures that have dented Ant’s breakneck growth.
Proposed rules to break up market concentration in digital payments and rein in consumer lending online will damage prospects for Tencent’s WeChat Pay and its wider fintech business. Bloomberg reported this month that regulators are considering asking the company to fold its fintech operations into a holding entity that could be regulated more like a bank.
What Bloomberg Intelligence Says
Tencent’s fintech focus on risk management over scale threatens to grind its growth gears as the company tiptoes through a hair-trigger regulatory landscape fraught with potential hazards.
— Vey-Sern Ling and Tiffany Tam, analysts