Beijing’s crackdown on its most powerful internet companies is clouding the outlook for Tencent Holdings Ltd. and its $ 120 billion financial services operation as it seeks new sources of growth.
China’s leading watchdogs have stepped up oversight of the country’s most valuable company, examining everything from Tencent’s information about the online behavior of a billion people and more to an investment portfolio spanning hundreds of startups. Regulators are reportedly considering forcing Tencent to overhaul a promising fintech division, turning the operation into a holding company in the same way they are demanding of Jack Ma’s Ant Group Co.
The uncertain outcome of this far-reaching effort will eclipse Tencent’s gaming giant arm when it releases its quarterly results on Wednesday. Billionaire founder Pony Ma and his lieutenants face questions about Beijing’s intentions and how it could go about revamping China’s largest online banking and lending operation after Ant’s. The threat of a probe has already erased $ 170 billion from the company’s value since a January high. Its shares remained largely unchanged on Wednesday.
Ma met with officials from the State Administration for Market Regulation earlier this month to discuss compliance at Tencent, Reuters reported on Wednesday. Officials for the meeting, which was initiated by Ma, expressed concern over some of Tencent’s business practices and called on the group to comply with antitrust rules, Reuters said, citing people with knowledge of the matter. The antitrust watchdog was gathering information and examining WeChat’s potential monopoly practices, according to the report. Tencent made no immediate comment on the report.
“Tencent is all too familiar with the specter of further regulation on its gaming business,” said Michael Norris, research director at the Shanghai-based consultancy firm in China. “Investors may wonder how far anti-monopoly control can inhibit Tencent’s investing activities, in games or other verticals.”
In the near term, investors are betting on another strong performance from a company whose earnings have exceeded expectations in three of the past four quarters. Things to watch out for for Wednesday include:
- Plans for a makeover. Restructuring fintech could be much more complicated than with Ant. Unlike Jack Ma’s company – which manages its fintech operations through a single entity – Tencent’s payments, money management and lending services are spread across different units. All of them rely on WeChat, the means by which Tencent reaches users and markets products, including games from Honor of Kings to League of Legends.
- Comments on a repression on several fronts. The Chinese antitrust watchdog has penalized Tencent and its peers for failing to seek approval of earlier investments and acquisitions. Lawmakers again spoke about gambling addiction among young people at a gathering of key Chinese leaders in Beijing in March. And Tencent is awaiting approval to complete a planned merger of game streaming giants Huya and DouYu, which will create an industry leader.
- The bottom line. The company is expected to post 52% net profit growth, the second fastest in nearly three years. Investors will be eager to see Tencent get its spending under control while battling Alibaba and Baidu Inc. in cash-hungry arenas like video streaming.
- Dynamics of online play. Tencent must produce the hits to maintain a growth rate that exceeded 45% in the September quarter. The latest Moonlight Blade smash should have helped over the holidays, but future titles remain key: 43 new games are slated for 2021, said HSBC analyst Binnie Wong.
- Advertising and payments. Some analysts see them as the two most important drivers of future growth, given that Tencent avoids passing users off with ads and has yet to fully monetize WeChat Pay. China’s dominant messaging service is expected to host $ 240 billion in transactions for 400 million daily users of its lean apps in 2020.
- Go global. It shows progress overseas with the mobile versions of Call of Duty and PUBG.
- Fintech. Including cloud computing, the fintech and business division generated $ 4.8 billion in revenue for the September quarter, or more than a quarter of total sales.
It’s the financial deal – valued at between $ 105 billion and $ 120 billion, according to Bernstein’s estimates – that may attract immediate scrutiny. China launched a previous campaign in November to contain its biggest companies, focusing first on the two pillars of Jack Ma’s empire, Ant and Alibaba Group Holding Ltd. But this month, Xi Jinping warned he would target “platform” companies that amass data and market power, a sign that the Internet crackdown is widening.
What Bloomberg Intelligence says
China’s growing crackdown on Tencent companies could spill over to other fintech giants, limiting growth in credit, wealth and online payments markets to high single-digit rates by 2025 , from 12 to 19%, based on our scenario. Dominant names like Ant, Tencent’s fintech, Duxiaoman, and JD Tech may come under more scrutiny than smaller rivals. – Francis Chan, analyst
The most visible of Tencent’s money services is WeChat Pay, inextricably linked to the eponymous messaging service and payment method of choice on ridesharing platform Didi Chuxing and food delivery man Meituan. But like Ant, he also runs services that challenge the public banking sector.
The fintech business achieved sales of around 84 billion yuan in 2019, or around 70% of Ant’s sales for the year. Its business development group, which oversees new initiatives, manages wealth management, including mutual fund investment options offered through WeChat and QQ, Tencent’s other social success.
A potentially thorny area is that of the so-called micro-loan operated by WeBank owned at 30%. Under requirements introduced when Beijing abandoned Ant’s IPO, online lenders must keep 30% of all loans on their own books rather than with partners such as banks. While Tencent now acts as a pipeline instead of a co-lender, and the rules are still unclear, it may need to inject capital if it is to co-finance 30% of all funding. Management said, however, that the microcredit rules should not impact Tencent’s flagship consumer product, Weilidai.
“Tencent’s regulatory risk results primarily from its ‘greatness’,” Bernstein analysts, including Robin Zhu, said in a March 23 memo. But its “competitive position in its main businesses remains very solid”.
(This story was not edited by NDTV staff and is auto-generated from a syndicated feed.)