(Bloomberg) – Beijing’s crackdown on its most powerful Internet companies is obscuring the outlook for Tencent Holdings Ltd. and its $ 120 billion financial services operation as it seeks new sources of growth.
China’s top vigilantes have stepped up supervision of the country’s most valuable company, examining everything from Tencent’s perceptions of the online behavior of more than a billion people to an investment portfolio that spans hundreds of startups. Regulators are considering forcing Tencent to overhaul a promising fintech division by turning the operation into a holding company, just as Jack Ma’s Ant Group Co. is being demanded.
The uncertain outcome of this broad effort will overshadow Tencent’s giant gaming arm when it reports quarterly earnings on Wednesday. Billionaire founder Pony Ma and his lieutenants face doubts about Beijing’s intentions and how it could renovate China’s largest online bank and lending operation after Ant. The threat of an investigation has already wiped out $ 170 billion of the company’s value since its peak in January. The shares remained largely unchanged on Wednesday.
Ma met with officials from the State Administration of Market Regulation earlier this month to discuss compliance at Tencent, Reuters reported on Wednesday. Officials at the meeting, which was initiated by Ma, expressed concern about some of Tencent’s business practices and asked the group to comply with antitrust rules, Reuters said, citing people with knowledge of the matter. The antitrust agency was collecting information and investigating possible WeChat monopolistic practices, according to the report. Tencent did not immediately comment on the report.
“Tencent is very familiar with the additional regulatory spectrum on its gaming business,” said Michael Norris, research manager at Shanghai-based consultancy AgencyChina. “Investors may question the extent to which anti-monopoly scrutiny can inhibit Tencent’s investment activities, in games or other verticals.”
Read more: Tencent said it will face widespread crackdown on Fintech in China, business
In the short term, investors are betting on another robust performance by a company whose profit has exceeded expectations in three of the past four quarters. Items to note on Wednesday include:
Plans for a makeover. The restructuring of the fintech team can be much more complicated than with Ant. Unlike Jack Ma’s company – which manages its fintech operations through a single entity – Tencent’s payment, money management and loan services are spread across different units. They all rely on WeChat, the way in which Tencent reaches users and markets products, including games from Honor of Kings to League of Legends. Comments on a crackdown on several fronts. China’s antitrust body penalized Tencent and its peers for not seeking approval for previous investments and acquisitions. Lawmakers again brought gambling addiction among young people during a meeting of top 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 company is projected to show net revenue growth of 52%, the second fastest in almost three years. Investors will be eager to see Tencent control spending while fighting Alibaba and Baidu Inc. in arenas that consume money, such as streaming video. Moment of online gambling. Tencent is expected to beat successes to sustain a growth rate that exceeded 45% in the September quarter. The latest hit, Moonlight Blade, should have helped on vacation, but future titles remain essential: it has 43 new games scheduled for 2021, said Binnie Wong, an analyst at HSBC.Advertising and Payments. Some analysts point to these as the two most important drivers for future growth, as Tencent avoids overwhelming users with ads and has not yet fully monetized WeChat Pay. China’s dominant messaging service was designed to host $ 240 billion in transactions for 400 million daily users of its lite apps in 2020. Going global. Progress abroad is demonstrated with the mobile versions of Call of Duty and PUBG.Fintech. Covering cloud computing, the fintech and business division generated $ 4.8 billion in revenue in the September quarter, more than a quarter of total sales.
Read more: Xi warns against excessive technology in the repression of signs
It is the financing operation – valued at between $ 105 billion and $ 120 billion, according to Bernstein’s estimates – that can attract immediate scrutiny. In November, China launched a precedent campaign to control its largest corporations, focusing first on the two pillars of Jack Ma’s empire, Ant and Alibaba Group Holding Ltd. Tencent executives were quick to commit to working with regulators and maintain a prudent financial strategy. But this month, Xi Jinping has warned that he will go after “platform” companies that accumulate data and market power, a sign that the crackdown on the Internet is widening.
What Bloomberg Intelligence says
China’s growing crackdown on Tencent’s business could spread to other fintech giants, limiting the growth of online credit, wealth and payment markets to high single-digit rates by 2025 of 12-19%, based on our scenery. Dominant names like Ant, Tencent’s fintech, Duxiaoman and JD Tech may be under more stringent scrutiny than smaller rivals.
– Francis Chan, analyst
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The most visible of Tencent’s money services is WeChat Pay, inextricably linked to the e-mail service and the payment method of choice on the Didi Chuxing platform and the Meituan food distributor. But, like Ant, it also runs services that challenge the state-owned banking sector.
The fintech business had revenue of around 84 billion yuan in 2019, about 70% of Ant’s sales for the year. Its Corporate Development Group, which oversees the latest initiatives, manages wealth management, including mutual fund investment options offered through WeChat and QQ, another social success from Tencent.
A potentially thorny area is the so-called microcredit business operated by 30% of WeBank. In line with requirements introduced when Beijing canceled Ant’s IPO, online lenders are expected to keep 30% of all loans in their own books, rather than with partners like banks. Although Tencent now acts only as a channel instead of a co-creditor, and the rules are still unclear, it could have to inject capital if it needs to co-finance 30% of all financing. Management, however, said microcredit rules should not impact consumer product Weilidai, Tencent’s flagship product.
“Tencent’s regulatory risk stems mainly from its ‘grandeur’,” said Bernstein analysts, including Robin Zhu, in a March 23 note. But its “competitive position in its main businesses remains very solid”.
Read more: Tencent Bulls looks at profits as stocks rise from record highs
(Updates with the Reuters report in the fourth paragraph)
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