Who is killing Tencent? Plummeting share price alarms investors

EDINBURGH — Naspers is an important stock in South Africa. Because of its market capitalisation, it represents a sizeable chunk of the main market indices. Underpinning Naspers, meanwhile, is the Chinese tech giant Tencent. This is because Naspers bought Tencent in 2001 when it was a small, glittering start-up and has benefited from the tech company's mushrooming success. But, Tencent is maturing as is the internet sector. Tencent is fighting fierce competition in the Chinese market. What's more, government regulations are impacting on the business, says The Economist in response to a Chinese business news site article that asks: "Who is killing Tencent?". – Jackie Cameron..By Thulasizwe Sithole.The stock price of Chinese tech giant Tencent has plummeted, causing alarm. The Economist examines the change of fortune for Tencent, which has fuelled Naspers for a considerable period.."It would be no surprise if Tencent were feeling touchy as it approaches its 20th anniversary on November 11th. Its shares, traded in Hong Kong since 2004, have fallen by 28% in 2018 (see chart). This time last year it was the first Asian company to be worth half-a-trillion dollars, hitting a record valuation in January of $573bn. It has since shed $218bn, roughly equivalent in value to losing Boeing or Intel. Other Chinese internet stocks have fared worse than Tencent, among them NetEase, a gaming rival, and jd.com, an e-commerce firm. But even so, the drop stands out," says the publication..___STEADY_PAYWALL___.Tencent posted its first quarterly profit decline for nearly 13 years in the three-month period ending in June, notes The Economist. "A regulatory hold-up that was blocking it from charging for new video games was the chief culprit, it explained. Although it has sprawled into all sorts of areas, from online lending (WeBank) and insurance (WeSure) to offline medical clinics (Tencent Doctorwork), the company still derives over two-fifths of its revenue from gaming. Its latest big bet in mobile games, 'PlayerUnknown's Battlegrounds', has accrued a huge audience of some 50m Chinese gamers who play daily, but because of the monetisation freeze, Tencent cannot cash in."."The government suspension, which began in March without explanation, had been expected to ease in the autumn. Analysts now assume that Tencent will need to tough it out until the second half of 2019. Even once game approvals start up again, the government has said that their number will be limited. To allay Communist Party concerns about the mental and physical health of young gamers, Tencent is also having to curb gaming time and set up a system of user-identity checks," it continues..Some analysts say there is more to this slowdown in online games. Steve Chow of Agricultural Bank of China International (abci), a Chinese investment bank, reckons users may simply be spending less time on Tencent's online entertainment, as other players eat into its market share. For its flagship game, "Honour of Kings", for example, the average number of daily active users has dropped by a fifth in the past year or so, to 54m in September, highlights The Economist.F"or skittish investors, all this has concentrated minds on whether the giant can maintain its momentum as it enters its third decade. Most agree that gaming will remain an important part of the company, but not its chief driver of revenue growth.."Two concerns are particularly acute. Because its games have done so well, Tencent has been lackadaisical in monetising other parts of its business. It has rightly been nervous about expanding advertising within WeChat, though the service sees unrivalled Chinese mobile traffic of over 1bn monthly active users. Last year Tencent took about one-tenth of total third-party spending on digital ads in China. But Baidu, China's leading search engine, took 19% and Alibaba, a giant in e-commerce, drew in almost a third.".Jerry Liu of UBS, a bank, tells The Economist that the wider tech sell-off stems from a recognition that China's maturing internet sector is becoming "a zero-sum game": dominant platforms are having to invest more to stay ahead and so their margins are shrinking.."Tencent's first internal-restructuring plan since 2012, announced in September, offers a clue to the company's thinking. In it Tencent set out a long-term shift away from the consumer internet towards business services, marking 'a new beginning for the company's next 20 years'. It has set up a new unit for cloud and 'smart' industries, combining all its on-demand software and online services for firms that seek to go digital.".Pony Ma, Tencent's boss, is reported as saying that the 'main battlefield' for mobile internet is moving from consumers to companies. "Alibaba, born to bring businesses online through its virtual emporia, has a strong lead in this arena. Last year it took 45% of China's fledgling cloud-computing market, worth 69bn yuan ($10bn), compared with 10% for Tencent, according to idc, a research firm. Still, Tencent doubled revenue in cloud services in the second quarter compared with the same period last year. Earnings from 'other businesses' (ie, payments and cloud) overtook those from its social networks for the first time.".Mr Chow reckons that Alibaba and Tencent can both create large businesses in cloud computing since the market has lots of room to grow. "And Tencent boasts powerful assets. WeChat is on over four in every five Chinese smartphones, so offers a massive market for firms. Last year it introduced a cloud-based platform that allows companies to offer services to users in WeChat via 'mini programs' (ie, tiny apps). There are more than 1m mini programs, used by over 200m people every day," reports The Economist..For now, however, its revenue from such mini programs and other built-in services is still minimal, while rivals have introduced their own offerings of mini programs. And its young staff are looking for opportunities elsewhere as there are few channels for promotion to decision-making positions..The Economist concludes that Tencent's outsize influence in China's online world is ballast that should steady it as it targets business customers. "For sheer scale, WeChat seems likely to hold its own. It has given Tencent a powerful distribution channel for its own games, and has allowed it to stymie new rival products, including Douyin, by blocking them from its platform. But the giant is under pressure, and seems to know it," it adds.

Who is killing Tencent? Plummeting share price alarms investors

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