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China’s most valuable company Tencent sees slower growth in profits

Written by Jiaxing Li Published on     3 mins read

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Regulatory changes are weighing down revenues for all major tech firms in China.

Tencent posted the slowest quarterly revenue growth since it went public in 2004, as multiple sectors of its business have been hit by China’s regulatory changes. Some of the biggest listed companies are also expected to report tapered profits as a consequence of a tech crackdown taking place in the country.

Tencent is China’s largest company by market capitalization. It racked up total revenues to the tune of RMB 142.4 billion (USD 22.0 billion) for the three months ended in September, an increase of 13% over the same period last year. A slew of new rules and restrictions in education, finance, and other sectors have hurt the performance of the company’s core businesses.

The video game sector is Tencent’s largest source of revenue. For the first time, the company broke down the revenue numbers for its domestic and international gaming businesses in its latest quarterly report. Restrictions on the gaming industry, including a playtime cap for minors and a lengthened process of issuing licenses for new games, have dragged down the growth rate of Tencent’s domestic video game business to 5%, while its international gaming business grew by 20% over the same period.

Minors accounted for 0.7% of time spent playing video games owned or operated by Tencent in September 2021, declining from 6.4% in the same period one year ago.

Tencent’s chief strategy officer James Mitchell said the company expects the suspension of game approval processes to be temporary, and doesn’t expect the playtime restrictions to be extended to adults.

The company’s social network revenues grew by 7% year-on-year to RMB 30.3 billion, driven by relatively rapid growth from video and music subscription services, the company said. Tencent Video produced the two most-watched TV dramas in the past quarter, drawing in millions of new subscribers. In addition, Tencent Music Entertainment saw a 37.7% bump in the number of paying subscribers and recorded a revenue uptick in Q3.

The company’s advertising business, which contributed 16% of its revenue, also posted a slow growth rate of 5%—the lowest rate since 2009, according to Bloomberg—as Tencent cited softened demand in key advertising sectors, including fintech and edtech. It expects advertising prices to remain low for the next several quarters.

Net profit increased 3% to RMB 39.5 billion yuan (USD 6.18 billion), its slowest in two years, mainly due to elevated bandwidth, cloud computing, and server costs, according to CFO John Lo.

“We are proactively embracing the new regulatory environment, which we believe should contribute to a more sustainable development path for the industry,” said chairman and CEO Pony Ma.

Tencent is now exploring new opportunities by leaning on its experience and strengths. With a strong track record in developing video games and social networks, Tencent will build its own metaverse through multiple pathways, Ma said. The game giant has already applied for trademarks related to this space, laying the groundwork for its interpretation of the internet’s evolution.

The company is also developing its own semiconductors. Last week, Tencent said its engineers have designed three chips and had a long-term plan for research and development.

Despite shifts in their businesses, regulatory woes are expected to weigh down profits for China’s internet giants. Alibaba said it will invest all of its incremental profits into core strategic areas in the coming year during its March quarter earnings report. Meanwhile, when Pinduoduo reported its Q2 financials, the company said it would allocate all profits from that quarter and future profits to its “10 Billion Agriculture Initiative” to support rural farmers.

In August, Tencent made a similar announcement, saying it would invest RMB 100 billion (USD 15.4 billion), roughly equivalent to its profit for the year of 2019, into corporate social responsibility initiatives.

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