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Sep 12, 2018
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Tencent under pressure to step up its game as regulatory restrictions bite

Sep 12, 2018

Tencent Holdings, which has lost some $200 billion (153.74 billion pounds) in market value this year, is facing fresh criticism from analysts and investors unnerved by regulatory roadblocks, a fuzzy overseas strategy and growing debt.


The gaming and social media firm is one of a number of Chinese internet companies whose prospects are suddenly in question after years of spectacular growth. But Tencent’s fall, triggered mainly by a government crackdown on online gaming, has been especially dramatic.

In the latest setback, Tencent on Monday shut an online Texas Hold’Em poker game in response to government scrutiny.

The authorities have frozen approval of new games and prevented Tencent from making money on some of its most popular titles, moves attributed to concerns about internet addiction and the violent and salacious content of some games.

“There is no sign the government has the will to loosen its grip on content-related businesses,” said Max Guo, associate director of investment at Zeal Asset Management in Hong Kong. “Tencent will remain a victim for the time being.”

The domestic regulatory troubles, combined with a weakening Chinese economy, have laid bare Tencent’s failure to develop a viable international strategy, some analysts say. The company’s WeChat messaging app, ubiquitous in China for everything from payments to entertainment, has gained little traction overseas.

As of 2016, Tencent was getting just 5 percent of its revenue from international operations, according to Eikon data, the latest available, compared with more than half for U.S. internet giants like Google and Facebook.

“China is going to run out of growth soon,” said Richard Windsor, an independent analyst with Radio Free Mobile. But international expansion is getting tougher by the day, he said, as consumers in other countries become accustomed to rival mobile apps.

Compared with homegrown rival Alibaba Holdings, which is known for a more aggressive investment style that often involve acquiring controlling stakes and forming joint ventures, Tencent tends to take minority stakes in strategic investments.

Its main international initiatives in the past year have included an investment in Tesla Inc and an increased stake in Snap Inc, which have both struggled.

According to exchange filings, Tencent’s investments in listed and unlisted associates rose to a record 152.8 billion yuan (£17.10 billion) at the end of June. Share of profit of associates and joint ventures increased by 206 percent year-on-year to 1.5 billion yuan.

At the same time, the company’s net debt increased to 35 billion yuan in the second quarter. That compares with net cash of 21 billion yuan in June last year. The company said the shift to a net debt position this year was mainly due to increased strategic investments.

“The strategic investment team of Tencent should focus on generating synergy with its core business and shaping up a coherent narrative for expansion,” said Charlie Chai, a Shanghai-based analyst with 86Research. “So far its investments are not creating much shareholder value.”


Founded in 1998, Shenzhen-based Tencent enjoyed uninterrupted growth from when it went public in 2004 until this year. Its shares have surged more than 88 times since its IPO, and its market value hit a peak of $578 billion in January before crashing to $380 billion now.

The company’s biggest money-maker is gaming. However, its most popular game this year is PlayerUnknown’s Battlegrounds Mobile (PUBG Mobile), and Chinese authorities have yet to approve the in-game purchases that allow Tencent to make money.

Acknowledging there is “no clarity” on when Beijing might remove regulatory blocks, Tencent management said last month it will try to generate more revenue outside China from PUBG Mobile and Arena of Valor, the overseas version of its top grossing game, Honour of Kings.

Arena of Valor brought in $30 million per month in the first half of the year outside China, while PUBG Mobile brought in over $20 million in July outside China, the company said.

CLSA managing director of Asia internet research Elinor Leung estimates once PUBG Mobile is approved in China, it could bring up to $1 billion of revenue a year for Tencent, while Honour of Kings already generates $2 billion a year.

But Windsor said Tencent had not been doing enough to expand its global gaming business, despite dropping a whopping $8.6 billion to buy “Clash of Clans” maker Supercell in 2016.

“I would be trying harder if I was Tencent,” he said, adding he thought Supercell’s release roster had been weak over the past year.

Chai said while he is not too worried about the regulatory crackdown on gaming, he’s concerned Tencent’s mobile game business is struggling to secure sustainable growth.
“The prospect is not encouraging and the sentiment will remain lukewarm,” he said.
He maintains a target price of HK$424 for the stock he considers a “long term core holding” and would only add position if the price dropped below HK$280.

The median target price of 41 analysts polled by Reuters Eikon has dropped 11 percent over the past month from HK$513 to HK$459. Tencent’s stock price now stands at HK$308, its lowest level in more than a year.

“Tencent needs to find a new pillar of growth,” said Guo.

Still, not all analysts are bearish.

“We are positive on Tencent’s revenue/profit growth upon gradual resumption of game approval, as well as its long-term leadership in social media, games and payment,” said Bocom analyst Connie Gu, who holds a buy rating on the stock.

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