Tencent Earnings Show Massive Impact of Regulations

After China's policy crackdown, the giant reported its slowest revenue growth in over a decade.
Nov. 10, 2021 22:40
Tencent Earnings Show Massive Impact of Regulations

(CapitalWatch, Nov. 10, Hong Kong) After being hit on several fronts with policy crackdowns, Tencent Holdings (OTC: TCEHY; HKEX:0700) reported its slowest revenue growth since 2004 in its third quarter earnings report.

A key reason Tencent is seeing such a slowdown is recent policies enacted in China that directly target multiple aspects of the gaming and telecommunications giant's business. The Chinese government has been cracking down with antitrust regulations and new policies aiming to mitigate minors' use of video games.

According to the company, sales of its mobile games such as Honor of Kings and PUBG Mobile rose 9%, domestic games revenue grew by 5%, and international games revenue rose 20%. Tencent reported that a small percentage of its customers are minors, just 0.7% in Sept. 2021 compared to 6.4% in the same month in 2020 when Beijing's new gaming regulations began. Although current games are seeing success, the government has also neglected to approve any new videogames since August.

Beijing continues to crack down on multiple industries in China related to Tencent's business. As new regulations slashed Tencent profits and weakened the gaming, insurance, and education sectors, the company reported that its advertising revenue growth rate slowed to 5%. Tencent said it expects advertising pricing to remain weak but will likely recover next year.

Despite the dramatic slowing of revenue growth, Tencent defied analyst expectations of a decline when its net profit rose 3% to $6.18 billion, Reuters reported. Despite the setbacks new policies have presented for Tencent, chairman and CEO Huateng Ma said in a press release that the company, like the rest of the industry, is working to adapt to new regulations and macroeconomic developments.

"We are proactively embracing the new regulatory environment which we believe should contribute to a more sustainable development path for the industry," Ma said.

According to Tencent, the company saw domestic games revenues grow 5% year-over-year to around $5.2 billion through the continued success of their top games like Honour of Kings, Call of Duty Mobile, and Moonlight Blade Mobile. International games revenues also grew, up 20% year-over-year to around $1.7 million from the performance of games like Valorant and Clash of Clans. Its social networks revenue grew %7 to about $4.7 billion, driven by the growth of its video and music subscription services, as well as live streaming and in-game purchases.

Earlier this week, Tencent Music Entertainment Group (NYSE: TME) released its earnings which showed both triumphs and tribulations as the company grapples with the new regulations.

According to the company, net profits for Tencent Music in the three months from July to September 2021 fell to $122 million compared to a net profit of around $176 million in the same quarter of 2020. Tencent Music reported that in the three months from July to Sept. 2021, total revenue was $1.21 billion, a 3% year-over-year increase.

Despite the lukewarm earnings, Tencent Music announced this week that it secured a deal with Apple Music to bring more Chinese content on Apple's platform. Tencent said that under the agreement, record labels and artists who are part of TME Music Cloud can now distribute music globally through Apple Music.

The company said its losses were largely the impact of new regulations and growing competition in the industry. Despite setbacks, the company still saw some successes this quarter, reporting that it increased its number of paying users by 5 million, or 37%, year-over-year.

Tencent's stock was up 2% Wednesday, at $61.13 per share in New York, and up 4% in Hong Kong, at HK$483.60 per share. Tencent Music was up 2% at $8.14 a share. Though the industry giant is continuing to adapt to new regulations and growth appears to be slowing, Tencent doesn't seem to be in dire straits as it's still reporting a profit and progress.
Topics:
Tencent, gaming, music