Online ads and venture investment supplanting gaming for revenueCOCO LIU, Nikkei staff writerMARCH 20, 2019 20:05 JST
Online games used to contribute around 40% of Tencent’s group revenue, but a stoppage in Beijing’s approvals of new titles has stunted growth. © Reuters
HONG KONG — Chinese social media and video game giant Tencent Holdingsannounces annual earnings on Thursday amid a spate of bad news from the country’s tech sector that has worried international investors.
Tencent itself has planned to shake its mid-level management team to boost growth. Analysts want to know whether China’s top game developer continued its third-quarter profit rebound into the final three months of 2018, and they will look for signs of what 2019 holds for the company in several areas.
Games
Chinese regulators in December ended a nine-month freeze on new video game licenses, but Tencent has yet to receive Beijing’s approval for two potentially lucrative games: “Fortnite” and “PUBG Mobile.”
Games once accounted for 40% of Tencent’s revenue, but the wait for approvals has raised doubts over how much the sector contributed in the fourth quarter of 2018.
China’s video game market has peaked, and regulators in the country have imposed tougher oversight on playing time for children. These changes may explain the company’s push to go global.
In November, Tencent granted Singapore-based online gaming publisher Sea the right to sell all its game titles in Southeast Asia. The Chinese company also appeared this month in the shortlist of bidders for top South Korean video game entity Nexon. Shares of Hong Kong-listed Tencent jumped to an eight-month high March 6 on news of that potential deal.
Online advertising
Sales of online advertising have gone a long way toward helping Tencent beat analyst estimates while its gaming business suffers. The sector contributed about one-fifth of the company’s revenue in the third quarter, up from only 10% in the second quarter.
Plenty of room for growth remains, analysts say. Though Tencent ranks third in Chinese online ad sales revenue behind e-commerce leader Alibaba Group Holding and search giant Baidu, it has topped those two companies in terms of attracting users’ attention, according to a report published by investment bank Bernstein in January.
WeChat, QQ and other Tencent products currently soak up roughly half of the time Chinese internet users spend on apps. But the company needs to improve the user experience amid rising competition from short-video app TikTok and other rivals.
Investment
Tencent holds more than 600 companies in its portfolio.
It owns 22% of Meituan Dianping, a Chinese online services business that raised more funding in its initial public offering than any other internet company worldwide over the past four years. Tencent also backs Chinese e-commerce platform Pinduoduo, which listed last year with an American IPO of $1.6 billion.
“We expect Tencent’s net gains from investments would be around one-third of its operating income in 2018, a significant increase over the past few years,” Bernstein analysts said in the January report.
“We expect the strategy to remain and investment income to play an even more important role going forward,” the report noted.
Yet many companies boasting Tencent investment have suffered amid a broader Chinese tech stock sell-off. Meituan shares have fallen by about one-quarter since its $4.2 billion listing in September.
Internal restructuring
Tencent looks to shift away from a consumer focus and become an internet company that serves industries, as discussed in October when it announced the first business restructuring plan in six years.
“Tencent’s mission is to become a digital assistant of all industries,” Martin Lau, the company president, said in a public letter last year.
The company cites the “internet of things” and fifth-generation wireless networks among its interests, despite offering few details. With Tencent executives expected to divulge overall strategies on Thursday, analysts will seek any indication of progress toward a so-called “industrial internet” era.
Tencent is also planning to replace 10% of its lowest-performing executives with younger managers as the company aims to slash labor costs and lay the ground for future growth, a number of Chinese media reported Tuesday. Some media put the number of affected executives at as high as 200 people.
Macroeconomic headwinds
Analysts await news of whether Tencent joins the list of Chinese companies hit by sluggishness in China’s economy.
U.S. President Donald Trump’s comment last week that he was in no rush to complete a trade pact with Beijing suggests that the trade war between the world’s two largest economies may not end soon.
Baidu has warned investors that a cooling economy together with the persistent trade tensions have cast a shadow over its online advertising business. E-commerce group JD.com plans senior management job cuts.
From Nikkei Asian Reviews