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Tencent president says big tech needs more regulation

Written by Nikkei Asia Published on 

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Chinese group beats profit forecast on hit games and fintech.

Even as investors scramble to understand how a recent policy tightening will affect China’s booming internet economy, the president of Tencent Holdings says that more regulations are needed in China to reflect a “new reality.”

Thursday’s comments by Martin Lau were made when the Shenzhen-based group reported a better-than-expected September quarter, thanks to a soaring demand for online games.

Total revenue for the three-month period grew 29% to RMB 125.45 billion (USD 18.95 billion) from a year before while profit jumped 89% to RMB 38.54 billion.

Analysts surveyed by FactSet had projected consensus net profit of RMB 31.69 billion on RMB 124.03 billion of revenue.

Tencent’s strong performance comes as Chinese authorities look to rein in the influence of the country’s leading internet platforms, which have penetrated every aspect of life in China through wide-ranging services.

Tencent was among 27 internet companies summoned by China’s market and internet regulators last week to a meeting aimed at enforcing order on the online economy. Beijing this week published draft guidelines that could outlaw anticompetitive practices such as selling goods below cost, price discrimination, and exclusive sales agreements.

Internet platforms’ financial service offerings have also come under tighter regulatory scrutiny recently, as highlighted by the abrupt suspension of Ant Group’s mega initial public offering last week.

Tencent shares fell heavily earlier in the week in the wake of the regulatory pressures, but rebounded 4.7% on Thursday to HKD 577 (USD 74.40) ahead of the results release.

Lau, the company’s billionaire president, assured investors during the Thursday conference call that the tighter regulatory environment is not unique to China.

“As technology companies become bigger and more important to the economy, I would say more regulations to reflect the new reality are needed,” Lau said.

The company is a major player in areas including gaming, digital payments, social networking, video streaming, and online music. But unlike internet companies such as Alibaba Group Holding and JD.com, Tencent has limited exposure to retail.

At the same time, the longtime Tencent executive also tried to set the company apart from other transaction-based internet companies, saying the new regulations have limited impact on its main businesses.

“For games, which essentially are individual products rather than platforms, I think they are less of the focus,” Lau said.

Revenue from online games, which accounted for roughly one-third of Tencent’s total sales for the quarter, grew 45% to RMB 41.4 billion from a year ago, thanks to popular smartphone games including “Peacekeeper Elite” and “Honor of Kings.”

While financial technology — including payment, microloans, wealth management products and insurance — has contributed to a bigger share of Tencent’s revenue, Lau said it is deliberately controlling the scale of the segment to manage risks, and is willing to collaborate with existing industry players.

“If you look at the principle we have in our fintech business, No. 1 is really the compliance with the regulations,” he said, adding the tighter regulations would not change its fintech development strategy.

Revenues from Tencent’s financial technology segment rose 24% to RMB 33.6 billion, primarily driven by higher returns from its WeChat Pay service and wealth management offerings.

Online advertising revenue increased 16% to RMB 21.4 billion, boosted by demand from education, internet service, and e-commerce companies, as well as a rebound in ad sales to property and automotive companies.

Jeffrey Towson, a professor at Peking University who specializes on China’s digital sector and a private equity investor, said new rules on advertising would be the key issue for Tencent, which has already adjusted to gaming controls over the past year.

“Regulations about advertising dominance are what I am watching for,” he said.

This article first appeared on Nikkei Asia. It’s republished here as part of 36Kr’s ongoing partnership with Nikkei.

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