Commentary on Political Economy

Tuesday 23 March 2021


It's galling how dictatorship works better than capitalist anarchy in some areas...

Tencent ’s Pony Ma Grapples with $170 Billion China Threat

Updated on 
  • China’s largest company may have to overhaul hit fintech arm
  • Beijing’s campaign to rein in internet ensnares WeChat giant
How Tencent Became China's Most Valuable Company
WATCH: How Tencent became China’s most valuable company.

Beijing’s clampdown on its most powerful internet firms is clouding the prospects for Tencent Holdings Ltd. and its $120 billion financial services operation just as it’s casting around for new sources of growth.

China’s top watchdogs have stepped up oversight of the country’s most valuable company, scrutinizing everything from Tencent’s insights into the online behavior of a billion-plus people to an investment portfolio that spans hundreds of startups. Regulators are said to be considering forcing Tencent to overhaul a promising fintech division, folding the operation into a holding company in much the same way they’re demanding of Jack Ma’s Ant Group Co.

The uncertain outcome of that wide-ranging effort will overshadow Tencent’s giant gaming arm when it reports quarterly earnings Wednesday. Billionaire founder Pony Ma and his lieutenants face questions on Beijing’s intentions and how it could go about revamping China’s largest online banking and lending operation after Ant’s. The threat of a probe has already wiped $170 billion off the company’s value since a January peak. It shares stood largely unchanged Wednesday.

Ma met with State Administration for Market Regulation officials earlier this month to discuss compliance at Tencent, Reuters reported on Wednesday. Officials at the meeting, which was initiated by Ma, expressed concern about some of Tencent’s business practices and asked the group to comply with antitrust rules, Reuters said, citing people with knowledge of the matter. The antitrust watchdog was gathering information and looking into potential monopolistic practices by WeChat, according to the report. Tencent had no immediate comment on the report.

“Tencent is all too familiar with the specter of additional regulation over its gaming business,” said Michael Norris, research manager at Shanghai-based consultancy AgencyChina. “Investors may query the extent to which anti-monopoly scrutiny may inhibit Tencent’s investment activities, in gaming or other verticals.”

In the short run, investors are betting on another robust showing from a company whose profit has surpassed expectations in three of the past four quarters. Things to watch out for Wednesday include:

  • Comments on a crackdown on multiple fronts. China’s antitrust watchdog has penalized Tencent and its peers for not seeking approval for previous investments and acquisitions. Lawmakers again brought up gaming addiction among youths during a gathering of top Chinese leaders in Beijing in March. And Tencent awaits approval to complete an envisioned merger of game streaming giants Huya and DouYu, which will create a sector leader.
  • The bottom line. The company is projected to post 52% net income growth, the second fastest in almost three years. Investors will be keen to see Tencent keep a lid on expenses while battling Alibaba and Baidu Inc. in cash-guzzling arenas like video streaming.

It’s the finance operation -- worth between $105 billion to $120 billion according to Bernstein estimates -- that may draw immediate scrutiny. China in November launched an precedented campaign to rein in its largest corporations, focusing first on the twin pillars of Jack Ma’s empire, Ant and Alibaba Group Holding Ltd. Tencent executives were quick to pledge to work with regulators and maintain a prudent finance strategy. But this month, Xi Jinping warned he will go after “platform” companies that amass data and market power, a sign the internet crackdown is widening.

What Bloomberg Intelligence Says

China’s widening crackdown on Tencent’s businesses could spill over to other fintech behemoths, limiting growth for online credit, wealth and payment markets to high-single digit rates by 2025 from 12-19%, based on our scenario. Dominant names such as Ant, Tencent’s fintech, Duxiaoman and JD Tech may come under tougher scrutiny than smaller rivals.

- Francis Chan, analyst

Click here for the research.

The Fight for Your Wallet

Alibaba unlocked greater revenue growth in fintech after it spun off Ant

Sources: Bloomberg, Ant

The most visible of Tencent’s money services is WeChat Pay, linked inextricably with the eponymous messaging service and the payment method of choice on ride-hailing platform Didi Chuxing and food deliverer Meituan. But like Ant, it also runs services that challenge the state-run banking sector.

The fintech business had revenue of about 84 billion yuan in 2019, about 70% of Ant’s sales for the year. Its Corporate Development Group, which oversees newer initiatives, runs wealth management including mutual fund investment options offered via WeChat and QQ, Tencent’s other social hit.

One potentially thorny area is the so-called micro-lending business operated by 30%-owned WeBank. Under requirements introduced when Beijing scrapped Ant’s IPO, online lenders must keep 30% of all loans on its own books rather than with partners such as banks. While Tencent now only acts as a pipeline instead of a co-lender, and rules are still unclear, it could have to inject capital if it must co-finance 30% of all funding. Management however has said the micro-lending rules shouldn’t impact Tencent’s flagship Weilidai consumer product.

“Tencent’s regulatory risk mainly results from its ‘bigness’,” Bernstein analysts including Robin Zhu said in a March 23 note. But its “competitive position in its main businesses remain very solid.”

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