Tencent profits jump 29% despite China’s regulatory crackdown

Tencent Holdings Ltd updates

Tencent has reported a jump in second-quarter profits, as one of China’s biggest tech groups bucked expectations of a deeper hit from a regulatory crackdown by Beijing.

The strong earnings, which topped analysts’ expectations, came despite some signs of slowing growth and broad investor concern that the social media and fintech group would be engulfed by the regulatory storm battering much of China’s technology sector.

The measures by the Chinese government, which have targeted groups ranging from video games makers to education providers, have knocked tens of billions of dollars off the value of Chinese companies, including Tencent. Shares in the Shenzhen-based business have fallen more than 40 per cent over the past six months.

Tencent said on Wednesday that net profit for the three months to June rose 29 per cent year on year to Rmb42.6bn ($6.6bn). This was well ahead of analysts’ estimates published by Refinitiv of about Rmb34bn.

Its revenues increased 20 per cent year on year to Rmb138bn after the company’s fintech and business services unit grew 40 per cent.

The strong performance from the division, which includes mobile payment platform WeChat Pay, came after a warning from financial regulators to Tencent and other Chinese fintech companies during the quarter to “rectify” problems of transparency and lending risks.

Under rising scrutiny from Beijing, chief executive Pony Ma noted the company’s social contributions.

“We are increasingly deploying our technologies and expertise to help SMEs, public services [and] corporations collaborate internally and connect with their users externally, which we believe contributes to the real economy and to society at large,” he said in a statement to Hong Kong’s stock exchange.

Second-quarter revenues at Tencent’s gaming business rose 12 per cent year on year, as the company emphasised its efforts to course-correct after Chinese state media this month slammed gaming as “spiritual opium”. However, analysts remain concerned over a slowdown in growth at the unit.

Shawn Yang, managing director at Blue Lotus Capital Advisors, said some analysts might have overestimated the short-term impact from the tougher regulatory environment.

But, he said, there were signs of slowing growth hitting Tencent’s higher-margin units, including gaming, which would offset the stronger performance of the lower margin fintech division. Advertising revenue growth, he said, also reflected the low base effect from the start of China’s economic recovery from Covid-19 last year. “Growth is slowing down . . . You should expect this slowdown to continue for the next one or two quarters.”

Tencent has tightened rules on how long minors can play its online games and is deploying facial recognition technology to stop young people skirting the rules.

“We have sought to pioneer a healthy game-playing environment in the game industry,” the company said, adding that “players aged under 16 accounted for 2.6 per cent of our China game grossing receipts” and that the gaming division had “benefited from international growth”.

Investors were also scrutinising the results for possible writedowns at Tencent-backed businesses stung by new regulations on China’s private education industry.

Under a radical overhaul, companies have been banned from making profits from teaching school curriculum subjects and barred from accepting foreign investment.

This has crushed stocks across the $100bn-a-year education sector, which has been an important investment focus for Tencent via groups such as VIPKID and Yuanfudao, as well as a significant source of advertising revenues.

Tencent said that revenues at its mobile advertising network fell quarter on quarter amid “reduced spending by companies providing after-school tutoring”, but this was outweighed by the contribution from recently acquired Bitauto, a car comparison website. Broader revenues from online advertising were up 23 per cent.

Tencent did not report any writedowns of its education investments.

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