Tencent’s revenue grew more slowly than expected by 13%, after China’s extensive technical intervention took a heavy toll on companies such as games and advertising.
Sales rose to 142.4 billion yuan ($ 22.3 billion) for the three months ending September, missing the average forecast of 145.4 billion yuan, according to an application on Thursday. Growth slowed for the sixth consecutive quarter and reached its slowest pace since Tencent went public in 2004. Net income was better than expected at 39.5 billion yuan, after posting gains from the divestment of some investments, although the non-IFRS result fell 2%, the first drop since Bloomberg began tracking data in 2010.
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Tencent’s third-quarter results – the first among China’s biggest technology giants – provide a snapshot of the far-reaching impact of Beijing’s campaign at its peak. The company’s huge influence in the world’s No. 2 economy has made it vulnerable as government control quickly engulfed everything from finance to education and online entertainment. Among the most deadly blows were July’s tutor purge, which decimated a major source of advertising revenue and a cap on children’s playing time, announced the following month.
“The pressure on Tencent’s advertising growth may continue over the next few quarters,” said Matthew Kanterman, Bloomberg Intelligence senior analyst. “While online gaming sales have held up well despite regulatory headwinds and new gaming releases adding promise to Q4 and 2022 trends, softer advertising trends could lead to a further downgrade of growth expectations.”
Online advertising rose 5% slower than expected, in part due to weakness in the education, insurance and gaming sectors, Tencent said in its application. It added that advertising prices could remain soft for several quarters “due to macro challenges and regulations affecting certain key advertising sectors.”
China’s largest company said on Wednesday that minors accounted for 0.7% of the time spent on their games in China and 1.1% of gross domestic revenue in September, down sharply from a year earlier. Domestic gaming revenue increased by 5%, lagging behind after the 20% jump in international gaming revenue.
While stricter limits on the amount of time children can play video games have had a negligible impact on gaming revenue, regulators have also refrained from approving any new releases since July, as they scrutinize applications more carefully. The slowdown has revived painful memories of a 10-month freeze on gaming revenue-generating licenses in 2018, which helped remove $ 200 billion of Tencent’s market value at the time.
The gambling restriction has likely also affected Tencent’s advertising revenue, as mandatory ID checks designed to filter out minors kept adults from playing some games, said Nomura analysts led by Jialong Shi. “This extra step has proven to be detrimental to these Candy Crush types of casual games,” they wrote in a note before the results. “These casual games are not only ad users themselves, but also contribute ad inventory to the mobile ad networks powered by large platforms like ByteDance and Tencent.”
So far, Tencent’s enduring hits like Honor of Kings continue to be its biggest gaming cash cows as it seeks new growth drivers. Fully owned by Riot Games Inc. can offer the greatest potential: its long-awaited League of Legends mobile game finally debuted in China last month, and the franchise’s e-sports tournament and new anime series attracted hundreds of millions of views for Tencent and its affiliates this past weekend.
The Fintech and business services segment continued to have the strongest growth and increased 30% in the quarter due to increasing commercial payment volumes, increased digitization and the consolidation of the car comparison site Bitauto.
Since launching a year ago, China’s tech crash has left several unresolved issues, including data security, the restructuring of fintech operations and the opening up of shielded Internet platforms. Tencent and arch-enemy Alibaba Group Holding have taken the first steps to open up their platforms to each other’s services, while the country’s tech industry regulator is said to be considering forcing WeChat to make its social articles visible on search engines like Baidu Inc. , Bloomberg News reported last month.
Tencent made it clear that it will comply with Beijing’s new rules.
“We are proactively embracing the new regulatory environment that we believe should contribute to a more sustainable industry development path,” the company said near the top of its earnings announcement. “In the domestic gaming market, our industry-leading efforts to fully comply with new rules significantly reduced the playing time and consumption of minors, promoting a healthier gameplay environment.”
The company is also making a deeper inroad into enterprise software and advanced technologies. Last week, the WeChat owner pledged $ 3 billion in resources over the next three years to its cloud business partners and unveiled its first self-made chips for use cases such as search and video transcoding.
© 2021 Bloomberg