Game over for Tencent? Think Again

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The online tech giant might be going through a tough time, but with one billion users it would be folly to write it off

 

Tencent was a fêted darling of the Chinese internet world just six months ago, before coming under a spotlight of suspicion. Profits have taken a “hammering,” according to analysts, and its share price has declined by about 40% since January, costing the tech giant some US$230 billion in market value.

 

By comparison, last year Tencent shares rocketed skywards 114%, making it the first Chinese company to top US$500 billion in value.

 

In certain quarters, Tencent’s sudden travails have been met by a degree of schadenfreude, with Ross Gerber, chief executive at Gerber Kawasaki Wealth and Investment Management, remarking on Twitter: “Social media has peaked. We told you last quarter and now we’re seeing it.”

 

To be sure, the tide appears to have turned on Tencent, but the Shenzhen-based company, which boasts some 44,000 staff, is such a behemoth it is premature to begin predicting any terminal outcomes. For all of Tencent’s current problems, above anything else it is a “platform” with an enviable user base of one billion.

 

Nevertheless, Tencent is a troubled monster, and its nagging issues are being noticed far beyond China’s borders. By some accounts, Tencent is being decimated by Beijing’s refusal to grant vital online gaming licenses, after Beijing reformed and reorganized the government bodies that oversee the sectors earlier this year.

 

By blocking the sale, for example, of blockbuster titles such as Monster Hunter: World, the argument runs, Beijing is hitting Tencent – a company that is highly reliant on the consumption of digital media – where it most hurts.  

 

Beijing’s dithering on issuing licenses and banning the sale of certain games comes amid state-media reports about the pernicious, addictive effects of mobile gaming, particularly on so-called left-behind children, or rural children left in the care of their grandparents while their parents work in the city.

 

“Stop game companies exploiting [the] vulnerability of rural left-behind kids,” shouted a recent headline in state-media mouthpiece, China Daily, which went on to add “data show that the percentage of rural children going to college has declined, which means they have little hope of changing their future.”

 

The European online edition also claimed that mobile gaming was causing nearsightedness among rural children has been increasing, even higher than urban children in certain provinces and regions and that many children were stealing money to pay for their gaming.

 

“While parents, schools and local communities can play their parts, the smartphone game producers must be properly regulated by laws so that they won’t target rural left-behind children in the future,” China Daily concluded.

 

Whether such arguments are really behind China’s stalled gaming sector or not, Tencent is indeed highly reliant on gaming, with a 51% share of the PC and mobile games market, according to Statista.

 

But as Deutsche Bank has noted in a recent report, Tencent’s woes are not restricted to gaming alone. It has also been struck by a drop in revenue on its online payment platform Tenpay and declining market share in digital content services.

It also begs to be noted, however, that Tencent’s sources of revenue are notoriously opaque. Meanwhile, some analysts have been quick to point to Tencent’s somewhat profligate acquisitions spending spree and the fact that it is not yielding dividends for its shareholders.

 

Bloomberg recently described this as “a problem with the venture-capital model … cherished by Chinese technology giants,” and which has seen Tencent spend more than $20 billion this year and $45 billion in the previous two – more than any other business in the world.

 

“In the year ending in June, Tencent reported 1.9 billion yuan ($275 million) in losses from investments in associates,” Bloomberg reported.

 

In other words, Tencent investors have good grounds for concern, but a clear-eyed look at the business reveals no reason to panic. WeChat Pay, the company’s online payments platform may lag behind its chief competitor AliPay, largely due to the fact that Alibaba controls the bulk of China’s online consumer commerce, but it still enjoys an approximately 40% market share.

 

Tencent is also testing a new unsecured consumer credit product called Turnover, which will allow WeChat Pay users to borrow up to 300,000 yuan ($43,250), while bypassing new government regulations aimed at preventing third-party payment platforms from holding deposits.

 

It has also announced a reorganization aimed at better developing its involvement with the booming sectors of healthcare and education, as a part of a broader move in the direction of becoming a more business-facing organization while maintaining, or so Tencent claims, its current billion-strong consumer base.

 

And that is a number that by any measure carries some weight.

 

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