24 April 2019
Tencent needs develop a viable international strategy amid regulatory headwinds at home, analysts say. Photo: Reuters
Tencent needs develop a viable international strategy amid regulatory headwinds at home, analysts say. Photo: Reuters

Tencent seen under further pressure amid China gaming crackdown

Tencent shares are expected to remain under pressure for some time as the Chinese internet firm’s growth prospects have come under question amid a government crackdown on online gaming.

The gaming and social media firm, which lost some US$200 billion in market value this year, is facing fresh criticism from analysts and investors unnerved by regulatory roadblocks, a fuzzy overseas strategy and growing debt, Reuters reports.

“There is no sign the government has the will to loosen its grip on content-related businesses,” Max Guo, associate director of investment at Zeal Asset Management in Hong Kong, was quoted as saying. “Tencent will remain a victim for the time being.”

Chinese authorities have frozen approval of new games in a bid to curb online addiction among the youth and block violent or inappropriate game content.

In the latest setback, Tencent on Monday shut an online Texas Hold’Em poker game in response to government scrutiny.

The domestic regulatory troubles, combined with a weakening Chinese economy, have laid bare Tencent’s failure to develop a viable international strategy, some analysts say.

The company’s WeChat messaging app, a market leader in China, has gained little traction overseas.

As of 2016, Tencent was getting just 5 percent of its revenue from international operations, compared with more than half for US internet giants like Google and Facebook.

Meanwhile, the firm’s net debt increased to 35 billion yuan in the second quarter. That compares with net cash of 21 billion yuan in June last year.

Tencent has said the shift to a net debt position this year was mainly due to increased strategic investments.

“The strategic investment team of Tencent should focus on generating synergy with its core business and shaping up a coherent narrative for expansion,” Charlie Chai, a Shanghai-based analyst with 86Research, told Reuters.

“So far its investments are not creating much shareholder value.”

Compared with homegrown rival Alibaba, which is known for a more aggressive investment style that often involve acquiring controlling stakes and forming joint ventures, Tencent tends to take minority stakes in strategic investments.

Its main international initiatives in the past year have included an investment in Tesla and an increased stake in Snap, which have both struggled, the report noted.

Founded in 1998, Tencent enjoyed uninterrupted growth from when it went public in 2004 until this year. Its shares have surged more than 88 times since its IPO, and its market value hit a peak of US$578 billion in January before crashing to US$380 billion now.

The firm’s biggest money-maker is gaming. Its most popular game this year is PlayerUnknown’s Battlegrounds Mobilee, but Chinese authorities have yet to approve the in-game purchases that allow Tencent to make money.

Analysts say Tencent had not been doing enough to expand its global gaming business, despite dropping a whopping US$8.6 billion to buy “Clash of Clans” maker Supercell in 2016.

“The prospect is not encouraging and the sentiment will remain lukewarm,” Chai said.

Tencent’s stock price now stands at HK$308, its lowest level in more than a year.

The median target price of 41 analysts polled by Reuters Eikon has dropped 11 percent over the past month from HK$513 to HK$459. 

“Tencent needs to find a new pillar of growth,” Guo told Reuters.

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