Shares in Tencent have been battered this year as the maker of 'Honour of Kings' has been hit by Beijing regulation © FT montage

Tencent’s disappointing second-quarter earnings rippled through markets from Hong Kong to Johannesburg, where major shareholder Naspers saw its shares plunge as much as 10 per cent and dragged down the entire index. But perhaps the bigger shock was that its status as a Chinese “national champion” could not protect it from the whim of Beijing.

China’s second most valuable company reported a 2 per cent drop in profits on Wednesday attributable to shareholders to Rmb17.87bn ($2.59bn). Shares in the company behind WeChat, China’s dominant social media platform, and the hugely popular Honour of Kings video game have been battered this year. Tencent’s market value has dropped about $170bn since January, and the stock fell a further 3 per cent on Thursday.

The hand of government was particularly visible in the 19 per cent quarter-on-quarter drop in income from video games, with the company hit by a revamp at the state regulator that has effectively frozen the commercial launch of new games. Beijing also forced Tencent this week to pull Monster Hunter: World, a title that had already signed up more than 1m pre-orders, just days after it was launched for failing to pass content requirements.

The company is confident that this will change. Martin Lau, Tencent’s president, told analysts on the earnings call that it was a question of “when not if” licences for new games start to be approved. “The administration is aware it’s now affecting the industry as a whole,” he said, adding that the government had created a fast-track process to grant temporary approvals to enable game publishers to make money — through in-house purchases of weapons and other in-game assets — for one month. As to the timing of more permanent licensing, however, Mr Lau admitted “we don’t have visibility”.

Tencent has been dealt government blows before, notably when Honour of Kings was attacked as an addictive “poison” last year. A day after the company started limiting the amount of time children spent on the game, its market capitalisation fell by $15bn.

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Duncan Clark, chairman of tech consultancy BDA, said Beijing’s move to take on the gaming industry fitted with a broader move by President Xi Jinping to tighten political control.

“If religion was the opium of the masses, maybe mobile games were the opium of the modern masses [in China]”, he said.

“But in the new world, where Xi is trying to get attention from academics and the masses to [listen] to his message and view of history, you can see how that shifts the previous consensus that this was a way of keeping people occupied.”

Now, Mr Clark added, the Chinese Communist party wanted to “take the remote control”.

Tencent had broadly been seen as enjoying good relations with Beijing. Pony Ma, its chairman and chief executive, is a member of the National People’s Congress, China’s rubber-stamp parliament, and devotes substantial time to dealing with government officials, according to people close to the company.

From Beijing’s point of view, Tencent is a natural champion: an innovative, tech-driven company that is the taproot of a sprawling ecosystem that is a key part of the economy, spawning developers, retailers and even video stars. It also plays a role on the international stage, as an investor with stakes in Tesla, Snap and Spotify.

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But Mr Clark said gaming does not now slot as naturally into Beijing’s motives as ecommerce, the cash cow of Tencent’s rival Alibaba, which aligns more closely with the national push towards a consumption-led economy.

The company’s rhetoric about measures to offset areas of revenues weakness via international markets, esports and financial services speaks to this shift.

Overseas operations have already helped at the margins. China’s gaming market may be in a funk but Tencent rode the phenomenon that is Fortnite, thanks to its stake in US publisher Epic Games. At the same time, two of the company’s China-made games are starting to make inroads outside of its home market, especially in south-east Asia.

In esports, Tencent is a Chinese leader, creating games, enabling livestreaming and even owning physical gaming venues — sleek, souped-up versions of internet cafés. The company has also invested in related start-ups, such as video game livestreaming company Huya.

“Our optimism and support for esport is long-term,” chief operating officer Ren Yuxin told a conference in Shanghai earlier this year. “In the future we will invest far more in resources, personnel and capital.”

In payments, where margins have been battered by a bruising battle with Alibaba’s Ant Financial, executives pointed to a similar strategy to that of their rival: pushing out more financial services to merchants, such as consumer loans and wealth management, which attract bigger fees.

That is designed to offset rules being rolled out by the People’s Bank of China that will force third-party payments companies to shift customers’ money into custodial funds rather than earn interest income on it. Analysts Jefferies estimates that this cost Tencent Rmb2bn of quarterly revenues in the second quarter and will also hit its second-half numbers.

China gaming chart

Less attention was paid to another growth engine: Tencent’s 700-plus-strong portfolio of investments. The company led the world with exits via the public markets in the past 18 months, according to CB Insights, with 11 of the start-ups it had backed having listed since the beginning of last year.

More are to come: Meituan-Dianping, the food and services delivery app, and Tencent Music Entertainment have both filed to list shares. Others in its portfolio, including ride-hailing app Didi Chuxing, look set to follow.

If its efforts to reverse fortunes on gaming fail, Tencent may soon — like SoftBank before it — start looking more like an investment fund than a tech company.

Tencent spreads its tentacles overseas

Tencent’s portfolio of companies numbers about 740 holdings and reads like a who’s who of the Chinese tech world.

But while it has spun off stakes on the public markets in 11 of these, the after-market performance has been ugly with only one, livestreaming gaming company Huya, still above the initial public offering price.

Most recently Pinduoduo, a shopping site that allows groups of friends to buy goods at discount prices, leapt 35 per cent on its debut on the New York Stock Exchange giving the company a market value of almost $30bn. It was shortlived: by Wednesday, less than a month later, it was $19.6bn.

China Literature, an ebook company, almost doubled on its debut in November last year, with shares closing at HK$102.40. On Thursday they closed at HK$49.85, below the HK$55 IPO price.

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