Tencent plays down talks of break-up despite regulatory risks, slowest ever quarterly revenue growth

As executives from Tencent Holdings fielded questions from investors and analysts in its earnings call on Wednesday evening, one query appeared to have hit a nerve.

When chief strategy officer James Mitchell was asked whether Tencent might spin off some of its businesses, so as to “not seem so large in the eyes of your regulators”, he quickly shifted the question to founder and chief executive Pony Ma Huateng.

Before Ma had the chance to say anything, however, president Martin Lau Chi-ping spoke up, saying that any talks of breaking up Tencent are “highly speculative” and “not something that we consider at this point in time”.

Behind the delicate question are growing concerns among investors that the Chinese government may want to split up the 24-year-old social media and video gaming giant, known for occupying “half of the mountains and rivers” of China’s internet landscape through its sprawling stakes in hundreds of internet firms, including on-demand service provider Meituan, the country’s second largest short-video platform Kuaishou Technology and e-commerce company Pinduoduo.

Tencent quarterly profit surges 60 per cent on back of one-off gain from JD.com deal

Tencent’s extensive empire – which covers finance, social media, video gaming, e-commerce, cloud computing, streaming video and news – has helped it become one of the most indispensable service providers for China’s 1 billion internet users, as well as the most valuable publicly-listed Chinese tech company. Its leading position has now become a source of anxiety as Beijing tries to limit the “irrational expansion of capital”.

After Reuters earlier this month published an opinion piece arguing that a break-up of Tencent is “a radical but simple way” to address mounting regulatory hurdles, a sell-off of the internet giant’s shares in Hong Kong ensued, even though there was no evidence to suggest that a carve-up is on the way.

To date, neither the Chinese government or any state media outlets have made any comments on breaking up Tencent. While China’s antitrust regulator had punished the company for failing to report a number of merger deals, Tencent was slapped with a fine of 500,000 yuan (US$77,243) for each those transactions, rather than being ordered to divest the acquired stakes.

Analysts said regulatory headwinds will continue to cast a shadow over Tencent’s prospects. And there is no indication that the intensity of government scrutiny is likely to change, said Mio Kato, founder of LightStream Research.

Tencent’s latest annual financial results showed a sharp slowdown in revenue and profit. The company’s revenue in the fourth quarter rose just 8 per cent from a year earlier, marking its slowest growth ever. Profit surged 60 per cent, thanks to a one-off windfall from offloading stakes in e-commerce platform JD.com.

For the whole of last year, Tencent’s profit advanced 41 per cent from 2020, while revenue increased 16.2 per cent, the slowest annual top-line growth since the company’s listing in 2004.

Meanwhile, Tencent’s stock has lost half of its value from its peak in February last year, when the company was on track to become the first Asian firm to have a market capitalisation of over US$1 trillion.

The downturn happened in tandem with the company’s efforts to comply with China’s increasingly stringent regulatory requirements and align its business with the state’s priorities.

To support the country’s “common prosperity” push, Tencent last year earmarked 100 billion yuan for charity projects. To comply with Beijing’s antitrust drive, the company gave up its exclusive music streaming rights. To meet government data security requirements, the company modified its popular app WeChat, known locally as Weixin, to separate domestic user data from those belonging to overseas users.

Tencent founder Ma has kept an extremely low profile and pledged allegiance to Beijing. After internet regulators, including the powerful Cyberspace Administration of China, convened a meeting of internet executives to lecture them on how to behave, Ma organised a study session and said he felt “warmth and encouragement”, according to a statement from the regulator in January. Ma also said Tencent would continue to “respond to the calls of the state and the times”.

Despite Tencent’s compliance efforts and pledge of loyalty, speculation continues on whether the company could face more scrutiny from Beijing.

One segment that is facing a possible restructure is Tencent’s financial technology business.

Company president Lau, who has been the chief architect of Tencent’s strategic investment deals for years, said during Wednesday’s conference call that the company was working closely with regulators to explore the possibility of setting up a financial holding company, and a final solution could benefit the company in the long run. Fintech, along with corporate services, generated 172 billion yuan in revenue for Tencent last year, accounting for 30 per cent of the company’s total revenue – nearly matching video gaming’s contribution.

Still, there are signs that China’s regulatory storm is ebbing. A conference chaired by Chinese Vice-Premier Liu He last week stated that the country’s regulation over Big Tech would be “transparent and predictable”, in an apparent move to stop a stock-price rout of Chinese companies listed in New York and Hong Kong.

Ivan Su, an equity analyst at Morningstar, said that this year’s regulatory environment would improve for China’s tech sector. “There could be small changes in the existing frameworks, but I don’t expect any new announcements of material tightening," he said.

Tencent has also proved its resilience in the face of intense government scrutiny. Even as Chinese authorities have suspended issuance of new video game licences since last summer, and enforced a three-hour-per-week online play time limit for minors, Tencent’s video gaming revenue in China rose 6 per cent last year, while overseas gaming revenue rose 31 per cent, thanks to the popularity of titles such as PUBG Mobile.

Tencent’s dominant status in video gaming and social media will continue to be the company’s biggest advantage in an increasingly competitive marketplace, because its domestic gaming and advertising businesses “should remain extremely large and profitable businesses in an absolute sense”, Kato at LightStream said.

It remains to be seen whether a break-up would materialise. For now, Tencent’s Lau said the focus is to ensure the strength of the company. “The most important thing is [that] each one of the businesses has to be optimised for its own service and for its own sustainable and healthy growth," he said.