(Bloomberg) -- Tencent Holdings Ltd. rose more than 2% after reassuring investors about an antitrust crackdown by Chinese regulators, in the most extensive public remarks by any of the country’s major technology companies since proposed regulations hammered their stocks this week.
President Martin Lau provided the company’s best assessment of a regulatory paper released just two days earlier, after Tencent reported 29% revenue growth in the third quarter from a Covid-era boom in gaming demand. He explained the WeChat-operator supports the government’s goals of fair competition and its social media and entertainment empire operates within competitive fields. He also made clear the company will comply with regulators’ policies.
Beijing on Tuesday proposed new rules intended to curb monopolistic practices across its internet landscape, spooking investors and wiping $290 billion off the value of market leaders from Tencent to Alibaba Group Holding Ltd. over two days. That followed new regulations governing the fintech sector that torpedoed the highly anticipated IPO of Jack Ma’s Ant Group Co., which would have been the largest market debut in history. Despite Friday’s rally, Tencent’s stock remains down more than 5% since the tech selloff started this week.
Lau said the company needed time to reach out to antitrust watchdogs and determine their goals. Tencent does think its relatively conservative approach to expanding beyond its core gaming and messaging services will be viewed favorably by the country’s powerful officials.
Read more: Down $290 Billion, China Tech Investors Mull Nightmare Scenarios
“Such regulation is not new, and it’s also not unique to China,” Lau said, rapidly expounding on five points he said he wanted to emphasize. “As technology companies become bigger and more important to the economy, I would say more regulations do reflect the new realities needed. It’s not just the case for China, it’s also the case globally.”
The government remained supportive of the internet and innovation, Lau stressed. Tencent embraces the philosophy of competition to the point, he added, that multiple internal teams compete against each other in new fields -- what’s been dubbed its “shark womb” philosophy.
The regulations threaten to up-end a Chinese ecosystem long protected from competition by the likes of Google and Facebook Inc. It’s now dominated by Alibaba and Tencent through a labyrinthine network of investment that encompasses the majority of the country’s startups in arenas from AI (SenseTime, Megvii) to fresh veggies (Meicai) and digital finance (Ant Group). Their patronage has also groomed a new generation of titans including food and travel giant Meituan and Didi Chuxing -- China’s Uber. Those that prosper outside their aura, the largest being TikTok-owner ByteDance Ltd., are rare.
The envisioned antitrust rules tend to focus more on transaction-based platforms than on Tencent’s entertainment businesses, Lau said on the call. The draft’s language suggests a heavy focus on online commerce, from forced exclusive arrangements with merchants known as “Pick One of Two” to algorithm-based prices favoring new users. The regulations specifically warn against selling at below-cost to weed out rivals.
“For them to say that must mean they’ve had some assurances,” Bloomberg Intelligence analyst Vey-Sern Ling said. “The other point that is very true is that online games and digital entertainment should be much less impacted.”
Tencent reported sales rose to 125.45 billion yuan ($18.9 billion) in the three months ended September, beating forecasts. The world’s largest gaming company reported net income of 38.5 billion yuan, surpassing projections of 30.3 billion yuan after it recorded a gain of 11.6 billion yuan from rising valuations for its tech holdings.
Revenue from Tencent’s core business surpassed expectations, suggesting the internet resurgence during Covid-19 still has legs. The Value-Added Services Business -- which includes gaming -- posted a better-than-anticipated 38% surge in revenue to 69.8 billion yuan. Online game revenues grew 45%, the fastest pace since 2017, while social network revenues increased 29% after the consolidation of game-streaming giant Huya Inc.
“Games were way ahead of expectations. This is important as it is the most profitable part of the business within Tencent,” Daiwa Capital Markets analyst John Choi said.
What Bloomberg Intelligence Says
Tencent’s 61% increase in 3Q mobile-game sales bodes well for the segment’s continued growth, especially considering its robust pipeline of new titles. The company’s pandemic-battered media ad segment may turn around soon, with 3Q’s 1% contraction narrower than the double-digit declines of the previous four quarters.
- Vey-Sern Ling and Tiffany Tam, analysts
Click here for the research.
Click here for a liveblog on Tencent’s earnings.
Tencent’s fintech business -- valued at anywhere from $200 billion to $300 billion before Ant’s IPO derailment -- has become one of its fastest-growing divisions. Together with cloud computing, the fintech and business services segment generated almost $15 billion or a quarter of total revenue in 2019. The bulk of that is from commercial payments facilitated by the WeChat super-app, where a billion Chinese schmooze, shop, and share cabs.
“We have a lot of respect for risk management and we have prudently managed risk,” Lau said. “And that includes deliberately controlling the scale of some of our financial products, including loans, wealth management products and insurance, so that we optimize for quality rather than just going for scale.”
Tencent is fending off stiffening competition from the likes of ByteDance and grappling with global macroeconomic uncertainty that continues to depress advertising. Ad sales however grew faster during the September quarter, thanks to big web-series releases and WeChat’s new ad slots. In-game spending globally is also showing signs of peaking.
Excluding the one-time gain, net income would have fallen in line with or below estimates. Tencent was a major beneficiary of the tech rally during the September quarter, given its ownership of some of the world’s largest tech players from JD.com Inc. and Meituan to electric vehicle maker NIO Inc. and online real estate platform KE Holdings Inc.
Tencent is known as a fierce competitor that can spook any upstart. But its leaders struck a markedly different tone in this unusual week. Executives, unusually, even name-checked ByteDance and applauded up-and-coming competitors like the creator of the wildly popular Genshin Impact.
“Our aspiration is not domination,” Chief Strategy Officer James Mitchell said at one point during the discussion, in a segment about the success of different game developers. “While the number of studios represented in the top 10 has diversified you can see that from our results we have been able to maintain a very healthy revenue and earnings trend in our games business. The diversification is good because it shows the market is becoming more dynamic.”
Read more: Tencent Ready to Make Case It Can Ride Out China Storm
For more articles like this, please visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg L.P.