China's Tencent falls 3% after disappointing earnings and scrutiny from Chinese regulators

Release time:2018-08-20
author:Ameya360
source:CNBC
reading:1134

A flag bearing the Tencent logo is displayed alongside a Chinese flag outside the company's offices in Beijing, China.

Tencent's stock was in focus after the company posted a quarterly earnings report on Wednesday that missed analyst expectations.

Thursday morning trade saw the Chinese tech giant's Hong Kong-listed stock sliding around 3 percent following the news. The company's profit for the quarter ending in June dipped 2 percent to 17.87 billion yuan ($2.59 billion), which was weaker than analysts had anticipated. That was also the first decline in profit for the company in almost 13 years.

"The disappointment will be broad based from these results, particularly in a market that's still sensitive to the downside globally at the moment," said Douglas Morton, head of research at Northern Trust Capital Markets.

Being more specific in his critique of Tencent's performance, Leo Sun, a technology specialist at The Motley Fool, said: "The big surprise was definitely the online gaming business."

Speaking with CNBC's "Squawk Box," Sun said the 6 percent year-over-year growth from the segment was "pretty disappointing" as it usually reports numbers in the double digits. Furthermore, he added, most of the growth came from older games such as "Honor of Kings."

To exacerbate matters, Sun pointed to the company's reported 19 percent sequential fall in smartphone gaming revenue, saying it is a result of Tencent's inability to obtain regulatory approval for the sale of in-game items in the mobile version of the popular battle royale game "PlayerUnknown's Battlegrounds."

According to the Wall Street Journal, the roadblock toward approvalis largely due to "PlayerUnknown's Battlegrounds" being a product developed by a company out of South Korea, a country that has had strained ties with China.

"PC games were also a problem," Sun said, pointing to an 8 percent sequential fall in revenues as personal computer gamers made the transition toward mobile devices.

Regulatory woes likely to be 'short-term'

The further fall in Tencent's stock comes days after it removed the game "Monster Hunter: World" from its WeGame distribution platform following multiple complaints by Chinese regulatory authorities. That move has led some to question the possibility of more regulatory woes ahead for the tech giant.

The removal of "Monster Hunter: World" a week into the title's China launch "really hurt," Sun said, adding, however, that it is unlikely to be permanent due to the importance of video games in Chinese tech.

Such issues with regulators are not new for Tencent, he told CNBC, saying the company has made tweaks to games such as "Honor of Kings" and Activision Blizzard's "World of Warcraft" in the past to satisfy the demands of regulators.

Echoing that sentiment, Morton said the Chinese regulatory environment "has always been stretched."

Additionally, Morton said, changes at the top of the Chinese regulator and the global rise in popularity of what he terms "tactical tournament games" have likely led the authorities to be "slightly more cautious than they otherwise would be."

"Eventually, the games will probably be approved again, but for now, there'll probably be a bit of short-term pain," Sun said.

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Tencent chairman pledges to advance China chip industry after ZTE 'wake-up' call: reports
Tencent Holdings chairman pledged to advance China’s semiconductor industry, saying the blow to ZTE Corp from Washington’s ban on U.S. firms supplying telecommunications company was a “wake-up” call, local media reported.China’s No.2 telecom equipment maker ZTE was banned in April from buying U.S. technology components for seven years for breaking an agreement reached after it violated U.S. sanctions against Iran and North Korea. American firms are estimated to provide 25-30 percent of the components used in ZTE’s equipment.While the U.S. administration said on Friday it had reached a deal to put ZTE back in business after the company pays a $1.3 billion fine and makes management changes, the plan has run into resistance in Congress, indicating ZTE was still far from out of the woods. Also, ZTE is yet to confirm the deal.“The recent ZTE incident made everyone more clearly realize that however advanced one may be in mobile payment, without the mobile, the chips and the operating system, you still cannot compete,” Chinese media reports cited Tecent’s Pony Ma as saying at a forum in Shenzhen on Saturday.Tencent, which alternates with Alibaba Group to be Asia’s most-valuable listed company, is the largest social media and gaming company in China and operates the popular WeChat app.Ma said “even though the ZTE situation was in the process of being resolved, we must not lose vigilance at this time and should pay more attention to fundamental scientific research”.Tencent is looking into ways it could help advance China’s domestic chip industry, which could include leveraging its huge data demand to urge domestic chip suppliers to come up with better solutions, or using its WeChat platform to support application developments based on Chinese chips, Ma said.“It would probably be better if we could get in to support semiconductor R&D, but that is perhaps admittedly not our strong suit and may need the help of others in the supply chain.”China has been looking to accelerate plans to develop its semiconductor market to reduce its heavy reliance on imports and has invited overseas investors to invest in the country’s top state-backed chip fund.
2018-05-28 00:00 reading:1022
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