Date
22 April 2018
Despite some weaknesses in its latest results, Tencent continues to enjoy a sound business model, dominance of the social media platform and strong capital. Photo: Reuters
Despite some weaknesses in its latest results, Tencent continues to enjoy a sound business model, dominance of the social media platform and strong capital. Photo: Reuters

Negative headlines unlikely to undermine Tencent

China’s internet giant Tencent Holding (00700.HK) has not suffered any major setback over the last decade or so. However, the company has encountered a string of bad news recently.

For starters, some analysts pointed out some weaknesses in its latest results.

It saw a 74 percent surge in net profit last year, but the gain was partly driven by disposal gains and fair value gains related to its investment activities, which came in at around 20 billion yuan (US$3.18 billion), about a quarter of its total earnings.

Fourth-quarter revenue was only up by 1.8 percent from the previous quarter, and mobile gaming revenue even declined by 9 percent over the same period, marking the first fall since 2015.

Meanwhile, its controlling shareholder, South African media and e-commerce group Naspers, said last week it raised nearly HK$77 billion from the sale of 190 million Tencent shares, or 2 percent of its holding.

The selling price at HK$405 per share represents a discount of 7.8 percent from the market price. Naspers’ stake dropped to 31.2 percent after the disposal.

Meanwhile, the earnings potential of Tencent’s payment business was also called into question following a report that China UnionPay, the national bankcard association, will integrate with the nation’s two dominant mobile payment networks, which are Tencent’s WeChat Pay and Alibaba’s Alipay.

Chinese regulators are bent on safeguarding financial security and preventing monopoly, and as such, Tencent and Alibaba simply can’t say no to the consolidation.

The arrangement means consumers can choose to use their UnionPay accounts for settlement even when they are using the WeChat Pay or Alipay platform.

Facebook’s data scandal and China-US trade friction could also have an impact on Tencent.

In the wake of the furor over Facebook’s data breach, all internet companies including Tencent could face more stringent regulation on how they use customer data. That could lead to higher compliance costs.

Tencent has been investing heavily in the United States in recent years. It has purchased video game developer and e-sports tournament organizer Riot Games, invested in Spotify and Snapchat, and expanded its online payment and e-commerce operations. If US-China trade ties sour, the negative repercussions would be hard to avoid.

Tencent has already forged a clear and prudent business model. Along with Alibaba, it is one of the two dominant internet players in China.

The two have used their massive capital to acquire potential rivals and maintain their market dominance. Also, Tencent has a healthy pipeline of more spin-offs in the coming years.

Despite the short-term woes, Tencent shares have displayed remarkable resilience thanks to its sound business model, dominance of the social media platform and strong capital.

Its ability to drive online traffic, in particular, would keep supporting the tech giant’s bid to acquire emerging businesses with good earnings potential. Such investment activities stand a good chance of becoming another core business.

– Contact us at [email protected]

RT/CG

Hong Kong Economic Journal columnist

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