Tencent marked 20 years since its founding with a torrid 2018, as pressure from above put the squeeze on its core games business. This year, it has been hit from below by younger, more agile rivals led by ByteDance.
The Chinese technology giant disappointed last week, with quarterly revenues of Rmb88.82bn ($12.9bn) falling short of analyst expectations of Rmb93.41bn. Advertisers were keeping a lid on budgets in the difficult macroeconomic climate but its WeChat messaging app has also been facing competition in selling ad space, from rivals including Douyin, the fast-growing short-video app from ByteDance.
Executives on its earnings call appeared to be struggling to chart a course that would revive its fortunes. Instead, the impression was of a company battling problems, from geopolitics to competition at home, with a horribly depleted arsenal.
Yet, as its shares have fallen more than 10 per cent over the past three weeks, not one of the 57 analysts covering the stock have recommended selling it, according to Bloomberg data. It still dominates gaming, where licence approvals by the authorities have resumed domestically, and “gaming is not going to disappear around the world, no matter what”, said Elinor Leung, analyst at CLSA.
Martin Lau, president, put forward ideas during the call about videos, both long and short, and the scope for synergies, such as co-opting characters from games or fiction (borrowing from its Kindle-like China Literature unit) into movies.
But it has been here before, setting its cap — and dollars — at both content generated by users and studios, with its push to emulate YouTube in 2017.
And just as regulators clamped down on approving its games last year, video content can also be heavily scrutinised, with accounts and apps closed if they fail to pass muster. The same has applied with its streaming of shows. Tencent is again having to defer airing historic costume dramas, a genre that has been touching nerves at Communist Party headquarters in Zhongnanhai for uncanny parallels with modern times raised by these long-ago tales of court intrigue and power struggles.
Tencent itself needs a new narrative, said David Dai, analyst at Bernstein Research. “If you are an investor, what are you investing in? It was gaming for the last five years. But if you are buying Tencent today you are not going to get in for gaming.”
Again regulators have put a dampener on things. From January 1, they nixed the ability to invest depositors’ funds, depriving both Tencent and Alibaba payments affiliate Ant Financial of a useful income stream.
With the latest quarter, the depositors themselves were the problem. Feeling the pinch, as China braced for weaker economic growth and the trade war with the US bred uncertainty, consumers were sitting on their funds. Fewer withdrawals meant lower revenues from withdrawal fees.
Remaining expectations rely on expected growth in enterprise services. While the cloud generated second-quarter revenues of $1.1bn for Alibaba, up 66 per cent year-on-year, Tencent, which bundles fintech and cloud together, saw revenues rise 37 per cent overall to Rmb22.88bn, largely from commercial payments and cloud services.
Globally, the majority of revenues are generated by software services sold on top of the cloud, where Chinese companies still fall short of matching the efforts of the likes of Germany’s SAP or Salesforce.com in the US.
Alibaba has led the way and shifted earlier this year to partnering to provide services, most notably joining hands with Salesforce last month. That illustrated the difficulties of going it alone, and will now mean sharing revenues and profits. Chinese competition is also rising, not least in the cloud, where Baidu and others are looking to make their mark.
There are stronger social and trade headwinds for Tencent as well. It is searching for new drivers at a time when the macro outlook is weaker. As a company straddling China and Hong Kong, where it is listed, it faces tremors from the protests roiling the territory.
Like hordes of millennials the world over, Tencent at 21 is finding it a tough time to come of age.
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