Tencent earnings report may offer answers into China regulatory threat that erases US$170 billion of value from January peak
- Stock has slumped 18 per cent since reaching a record-high of HK$766.50 in January as China tightens regulations on internet platform businesses
- Billionaire founder Pony Ma and his lieutenants face questions on China’s intentions after a clampdown on Jack Ma’s business empire
The nation’s top watchdogs have stepped up oversight of its most valuable company, scrutinising everything from Tencent’s insights into the online behaviour of a billion-plus people to an investment portfolio that spans hundreds of start-ups.
Regulators are said to be considering forcing Tencent to overhaul a promising fintech division, folding the operation into a holding company in much the same way they are demanding of Jack Ma’s Ant Group.
“Tencent is all too familiar with the spectre of additional regulation over its gaming business,” said Michael Norris, research manager at Shanghai-based consultancy AgencyChina. “Investors may query the extent to which anti-monopoly scrutiny may inhibit Tencent’s investment activities, in gaming or other verticals.”
The threat of a probe has already wiped US$170 billion off the company’s market value since the stock closed at a record HK$766.50 on January 25. In the short-run, investors are betting on another robust showing from a company whose profit has surpassed expectations in three of the past four quarters.
Things to watch out for Wednesday include its finance operation, which is worth between US$105 billion and US$120 billion, according to Bernstein estimates, that may draw immediate scrutiny.
China in November launched an precedented campaign to rein in its largest corporations, focusing first on the twin pillars of Jack Ma’s empire, Ant and Alibaba Group Holding (which owns the South China Morning Post).
Tencent executives were quick to pledge to work with regulators and maintain a prudent finance strategy. But this month, President Xi Jinping warned he will go after “platform” companies that amass data and market power, a sign the internet crackdown is widening.
The most visible of Tencent’s money services is WeChat Pay, linked inextricably with the eponymous messaging service and the payment method of choice on ride-hailing platform Didi Chuxing and food deliverer Meituan. But like Ant, it also runs services that challenge the state-run banking sector.
The fintech business had revenue of about 84 billion yuan in 2019, about 70 per cent of Ant’s sales for the year. Its Corporate Development Group, which oversees newer initiatives, runs wealth management including mutual fund investment options offered via WeChat and QQ, Tencent’s other social hit.
One potentially thorny area is the so-called microlending business operated by 30 per cent-owned WeBank. Under requirements introduced when Beijing scrapped Ant’s IPO, online lenders must keep 30 per cent of all loans on its own books rather than with partners such as banks. While Tencent now only acts as a pipeline instead of a co-lender, and rules are still unclear, it could have to inject capital if it must co-finance 30 per cent of all funding.
“Tencent’s regulatory risk mainly results from its ‘bigness’,” Bernstein analysts including Robin Zhu said in a March 23 note. But its “competitive position in its main businesses remain very solid.”