Tencent divestments could signal more sales amid Big Tech crackdown as it shifts focus to new tech like the metaverse

Tencent’s sale of Sea and JD.com stakes is raising questions about its holdings in other Big Tech firms like Pinduoduo and Meituan
The move aligns with regulators’ antitrust crackdown, but Tencent and analysts say it also allows the company to put resources into new tech like the metaverse

Tencent

Iris Dengin ShenzhenandJane Zhangin Hong Kong

Published: 5:10pm, 5 Jan 2022

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The decision by Tencent Holdings to sell its stake in Singapore-based e-commerce giant Sea Limited, hot on the heels of offloading JD.com stock, has led to speculation about further divestments in mature technology firms, as China’s largest social media and video gaming company seeks opportunities in new areas amid Beijing's continued antitrust campaign.

The divestment has raised questions about Tencent’s sprawling investments across a wide variety of companies. These holdings amount to US$130 billion, with US$80 billion held in publicly listed companies, according to Bloomberg Intelligence analyst Matthew Kanterman, citing Bloomberg data.

The tech giant, with an empire that touches the digital lives of nearly all of China’s 1 billion internet users, remains a principal investor in Pinduoduo, holding a 15.6 per cent stake, according to the social e-commerce company’s annual report in April 2021. Tencent also owns 19.4 per cent of Meituan, according to the on-demand delivery firm’s filing for the quarter ended September.

Tencent to offload its US$16 billion stake in e-commerce player JD.com

“Sea is a relatively mature, stable and financially self-sustaining business, and doesn’t necessarily need Tencent’s expertise anymore to execute on its goals,” Kanterman said. “Plus, from the levels at which Tencent has invested, there’s a big gain. So it makes sense for Tencent to consider exiting businesses such as Sea and JD.com that check those boxes.”

“Going forward, new opportunities in enterprise software and cloud services, as well as the metaverse, will become more prevalent and focus areas for investment,” Kanterman added.

Tencent announced on Tuesday evening that it would sell a US$3 billion stake in Sea, Southeast Asia’s most valuable internet company that operates e-commerce platform Shopee and gaming arm Garena, reducing its holdings from 21.3 per cent to 18.7 per cent and its voting power to below 10 per cent. The announcement comes two weeks after Tencent said it would sell a US$16 billion stake in JD.com, China’s second-largest e-commerce company after Alibaba Group Holding, the owner of the South China Morning Post.

The move by tech giants to offload large stakes in areas outside their core businesses is seen by some analysts as means of appeasing regulators amid a sweeping crackdown on the tech sector that has been ongoing for more than a year. UOB Kay Hian analyst Julia Pan also noted Alibaba’s recent divestment of shares in microblogging platform Weibo.

“The move could reduce the tech giants’ influence in China’s internet industry, which complements the government’s antitrust measures,” Pan wrote in a note on Wednesday. “We expect Tencent to continue to selectively divest parts of its portfolio of listed Chinese companies and return capital to shareholders.”

However, there are incentives to selling these stakes beyond regulatory concerns. Beijing’s tech crackdown last year hammered related stocks, wiping US$1 trillion dollars in value from the market. “This could be a way to signal to the market that it can harvest value from these very successful investments and reinvest in the next wave of technologies,” Kanterman said.

Morningstar analyst Ivan Su noted that Sea is no longer cheap and Tencent has realised a tenfold return on its investment.

“It makes sense that Tencent would want to sell down more matured investments like Sea and pivot to more early-stage opportunities, something that Tencent has been so good at,” Su said. “I do not believe reducing stakes in Sea will help or harm Tencent’s position in the monopoly crackdown.”

Tencent became one of Sea’s earliest investors in 2010, a year after China-born Singaporean founder Forest Li started the firm as a gaming company with nearly a dozen employees. The company went public in 2017, two years after launching e-commerce platform Shopee, a major competitor of Alibaba’s Lazada in Southeast Asia.

Over the past year, however, the concentration of market power in the hands of Big Tech firms has been a target of Chinese regulators. Beijing kicked off an antitrust campaign at the end of 2020, starting with an investigation into Alibaba. Last year, Alibaba and Meituan were hit with large fines over platform exclusivity requirements.

Tencent has also seen increased scrutiny. The State Administration for Market Regulation last year quashed a merger of Douyu and Huya, two video game live-streaming platforms controlled by Tencent, and slapped the company with multiple fines for failing to disclose merger and acquisition deals to regulators.

Tencent was fined again on Wednesday, along with Alibaba and video-streaming platform Bilibili, by the State Administration for Market Regulation over its failure to report certain deals.

Tencent said to form gaming studio for metaverse-like developments

Meanwhile, Tencent has been investing in the two buzziest tech trends of 2021: the metaverse and non-fungible tokens (NFTs). The metaverse, a concept of an immersive 3D space considered by some to be the next iteration of the internet, has attracted huge investments in the video gaming industry.

“The divestment provides Tencent with resources to fund other investments and social initiatives, while retaining a substantial majority of its stake in Sea and continuing to benefit from the company’s future growth,” Tencent said in its statement on Tuesday.

Still, the sale of Sea shares came as a surprise because the company has not been a target of Chinese regulators, according to Shawn Yang, managing director at Blue Lotus Capital. Sea has also proven to be a good strategic partner in gaming.

“It remains to be seen how Sea, the major distributor of Tencent’s games in Southeast Asia, will continue to work with Tencent on gaming,” Yang said. “Tencent may want to be more involved in its overseas distribution of games.”

Yang also noted that the market had been expecting pressure on Tencent to divest Pinduoduo and Meituan holdings. Pinduoduo shares fell 6.28 per cent on the Nasdaq on Tuesday to US$49.82. Meituan tumbled by more than 24 per cent, closing at HK$195.10 in Hong Kong on Wednesday.