Tencent is starting to feel the pain of China’s ‘new normal’

By Michelle Toh, CNN Business

Tencent’s growth has slowed significantly as a widening regulatory crackdown in China weighs on its business, particularly its once-booming gaming division.

In its first earnings report since China imposed new restrictions on how long minors can play online video games, the company posted a big dip in usage and billings from children and teenagers.

Tencent’s revenue was 142.4 billion yuan ($22.2 billion) during the three months ended September, a 13% increase compared to the same period last year. But that pales in comparison to growth rates of more than 25% it has posted in previous years. Profit rose just 3% year-on-year to 39.5 billion yuan ($6.2 billion).

CEO Pony Ma acknowledged the challenges in a call with analysts, saying that the entire tech sector had to adapt “to new regulatory and macroeconomic developments,” especially with regard to “the domestic games industries and certain advertiser categories.”

But “we are proactively embracing the new regulatory environment, which we believe should contribute to a more sustainable development path for the industry,” he added.

In August, China barred online gamers under the age of 18 from playing on weekdays and limited their play to just three hours most weekends, a significant toughening of restrictions on the country’s massive gaming industry.

Gaming companies, including Tencent, were also told by authorities to further clamp down on how minors could play video games — and focus less on profits in the process.

Tencent has recently rolled out new measures, including upgrading its screening system to identify and clamp down on adult accounts that may be misused by minors, according to the company’s president, Martin Lau.

Its efforts appear to be working: In September, the first month that Tencent’s new measures took effect, users under the age of 18 accounted for just 0.7% of time spent on the company’s games in China. That’s compared with 6.4% in the same period last year, according to Lau.

The ‘new normal’

Tencent — which also owns WeChat, the ubiquitous super app in China that allows users to do everything from send messages to pay bills — has long been one of China’s blue-chip stocks.

But as the company continues to grapple with an uncertain environment, its prospects are being called into question by some observers. Last month, Zixiao Yang, a managing director at Blue Lotus, a boutique financial research and advisory firm, issued a rare “sell” rating on Tencent, saying that investors hoping to buy in should probably “wait until all negative factors are priced in.”

Yang had already downgraded Tencent to “hold” in June, citing “uncertainty in regulation” and “increasing competitive pressure” from other social media networks.

He now projects that Tencent’s advertising revenue could see a slowdown in growth, particularly as some of its clients contend with headwinds of their own.

“Major automobile advertisers [have] cut spending because of disruptions in chip supply,” Yang wrote. “[And] real estate, online gaming and online education advertisers continue to cut spending because of [an] uncertain regulatory landscape.”

Tencent shares slipped nearly 3% in Hong Kong on Thursday, before paring some losses to close down 1.2%. The company’s stock has dropped almost 17% so far this year, wiping $117 billion off the company’s market value.

Asked about the prospect of a broader clampdown, Lau said Wednesday that the company believed that “stricter regulation is a new normal for the entire industry.”

“[But] we expect once the industry has really complied with the new regulations, have made all the adjustments … then the impact on the industry will be less and less over time,” he told analysts.

— Diksha Madhok contributed to this article.

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