China’s regulatory crackdown pushes Tencent to slowest revenue growth since 2004

Chinese gaming and social media giant Tencent Holdings (0700.HK) posted its slowest revenue growth since it went public in 2004 on Wednesday, hurt by a regulatory crackdown, and said the outlook for the advertising sector would remain weak into next year.

China’s largest company by market value has been hit on multiple fronts by new regulations, including limits on the amount of time children can spend playing video games. Curbs on other industries such as education have also dampened advertising appetite.

In addition, the Chinese government has not approved any new games since August, raising fears that the industry could see a repeat of 2018 when China suspended approvals of new video game titles over a nine-month period as part of an overhaul of the regulatory bodies that oversee the sector. [nL1N2Q10KB]

Tencent’s chief strategy officer, James Mitchell, said he expected the suspension to be temporary and that the company had a large backlog of games ready. He also said he did not expect China’s new gaming limits on minors to be extended to adults.

“We are proactively working with the regulators on implementing all the necessary changes,” Tencent president Martin Lau told analysts on a call.

“We expect that once the industry has really complied with the new regulations, have made all the adjustments, even when new regulations come around in the future…as the industry adapts further the impact on the industry will be less over time.”

Tencent’s third-quarter revenue climbed 13% to 142.4 billion yuan, slightly below expectations, and was the slowest quarterly growth since the company went public in 2004, Refinitiv data showed.

Net profit rose 3% to 39.5 billion yuan ($6.18 billion), the company said in a statement. This beat analyst expectations who were predicting a decline, according to Refinitiv data.

METAVERSE BUILDING BLOCKS

Beijing’s year-long crackdown on its once-freewheeling internet industry has punished well-known companies for engaging in what were previously considered regular market practices, wiping billions of dollars off their market values.

Tencent said its advertising revenue growth rate slowed to 5% in the period as the industry adapted to new regulatory and macroeconomic developments, citing weakness in categories including education, insurance and games.

It said it expected advertising pricing industry-wide to remain soft for several quarters but said the industry should adjust next year.

Sales from mobile games rose 9%, said the owner of games such as “Honor of Kings” and “PUBG mobile”. Domestic games revenue grew by 5%, while international games revenue rose 20%, boosted by games such as “Valorant” and “Clash of Clans”.

Tencent said minors accounted for 0.7% of domestic games time in September this year, down from 6.4% in September 2020, after the government’s new limits came into force at the beginning of that month.

Asked about Tencent’s view on the metaverse, the idea of a shared virtual world that people can access through different devices and where they can move through, Lau said it believed there were “multiple pathways to get into the metaverse opportunity”.

“In terms of our capabilities and positioning, we feel we have a lot of the technology and know-how building blocks for us to explore and develop for the metaverse opportunity.”