Written by Norman Isaac Mwambazi

Tencent Q2 earnings beat estimates amid scrutiny from Chinese regulators

Tencent Holdings (ticker: TCEHY), a multinational technology conglomerate holding company providing gaming, online advertising, and social media services, released its …

Tencent Holdings (ticker: TCEHY), a multinational technology conglomerate holding company providing gaming, online advertising, and social media services, released its second-quarter earnings report for the 2021 fiscal year (Q2 FY2021) and just like most tech companies, it beat consensus estimates. Tencent’s profit jumped 29% in Q2 FY2021 thanks to increased revenue from online advertising and popular games. The company saw a tremendous increase in demand for games like PUBG Mobile and “Honor of Kings” and eventually balancing out a drop in revenues from its other games like “Peacekeeper Elite”.

The report shows that Tencent earned a net profit of 42.6 billion yuan (about $6.6 billion) in Q2 FY2021, which exceeded a Refinitiv consensus estimate of 34.4 billion yuan (about $5.3 billion). The company also earned reasonable revenue from its stakes in other companies that registered good performance in the same quarter. Overall, Tencent’s revenue in the second quarter was 38.3 billion yuan (about $5.9 billion), a 20% growth from the quarter before. Mobile games alone fetched Tencent 13% of that revenue.

Tencent has continued to post good performance despite continued Chinese regulatory actions slapped against it that have raised concern among investors and other industry players, especially those in the technology sector. In recent months, the Chinese regulators have launched several anti-trust probes against Chinese tech giants like Alibaba, Didi, and Tencent, among others citing the need to protect private user data. Regulators also pushed for better treatment of consumers and employees alike.

In one of the probes, Chinese market regulators blocked Tencent’s proposal of a merger between live streaming platforms providers DouYu International Holdings Ltd (ticker: DOYU) and Huya Inc. (ticker: HUYA), which would give the company access to exclusive music rights agreements to boost its entertainment business. The planned merger was worth $5.3 billion.

On August 3, 2021, a China state media agency published an article in which Tencent’s online games were described as “spiritual opium” to express how addictive they are, especially for children. The company’s shares dropped as much as 8% due to the article, and they have yet to recover from that drop. Earlier this week, Tencent briefly lost its position as Asia’s largest company by market capitalisation to chipmaker Taiwan Semiconductor Manufacturing Company Ltd (TSMC, ticker: TSM). With a market cap of 4.19 HKD (about 538.12 billion), Tencent has since regained its position. However, according to its Q2 FY2021 report, it only generated 2.6% of its gross game revenue from players aged 16 and below. 

After getting slammed in the media, Tencent announced that it would put in place measures to reduce the amount of time and money children spend playing its online games so they can break their addiction to its games. The company plans to start with its most popular game, Honor of Kings.

In another measure to show its obedience to the law, compliance, risk management, and regulators’ requests, Tencent briefly suspended registrations of new users in China for its instant messaging platform WeChat last month to upgrade its security. WeChat is the most popular instant messaging service in mainland China, providing WhatsApp-like features.

Regulator effect…

Although Tencent posted results that exceeded consensus estimates, analysts and investors feel that it could have done way better if it were not for the long arm of the regulator always meddling in their business policies. From all accounts, it would seem, the long arm is increasingly reaching further.

Yesterday, Tuesday, August 17, 2021, China’s tech giants lost more than $50 billion in market value after the State Administration for Market Regulation (SAMR) proposed new anti-trust regulations, according to CNN Business. The SAMR says that the new rules are intended to tame the anti-competitive behaviour among big tech in China and protect consumers from harmful business practices by these firms.

Here is a brief breakdown of the new rules the SAMR announced on announced Tuesday:

Business operators will be forbidden from faking statistics and information about their product orders, sales and user reviews. The SAMR says that this fabricated information misleads customers into making consumption decisions they would otherwise not have made if they had been presented with accurate business operations and statistics.

Some companies have a (secret) tendency of paying numerous people to fabricate reviews about their competitors or rivals intended to hurt their reputations and use that to their advantage- a practice that will be banned as well.

Other practices targeted by the SAMR include companies using data, algorithms and other means to divert web traffic from their rivals. This also includes those companies that create obstacles to prevent customers from installing or running rival services on their devices, which is seen as unfair competition.

The general public would view these measures as good for customers, intended to protect their privacy and let them have a choice on what services to use and levelling the ground for fair competition among big, mid, and small-cap companies. Still, big tech’s revenue is not immune to the significant changes imposed.

In other regulatory news…

In China, the Ministry of Industry and Information Technology (MIIT) announced this morning that 43 apps were found to have illegally transferred user data like contact lists and location history, as well as consistently sending pop-up windows; most times against their will, or with hidden ways of opting out. It is increasingly clear that Chinese regulators are taking a big stance against companies harvesting user data and manipulating it to their advantage, something that infringes on their privacy. 

Some of the apps on the list include Tencent’s instant messaging service WeChat, Alibaba Group’s (ticker: BABA) e-reading app, Tmall Reader, travel giant Trip.com, and video streamer iQiyi, among many others.

MIIT has ordered the parent companies of these 43 apps to rectify their wrongs by August 25, 2021. Failure to adhere to these stipulations will have them face regulatory punishments. Some of the penalties that could be enforced on these companies for failing to abide by the regulations include removing them from app stores and paying hefty prices. These punishments could have an effect on the companies’ performance on the stock market, as has been the case with Tencent, Didi, and others that have fallen victim.