China’s entertainment and technology company Tencent Holdings Ltd on May 18, registered the worst profit drop since it went public. The Wall Street Journal (WSJ) commented that the heyday of booming Chinese consumer tech has passed away. The behemoth was one of the very few that remained after the major regulatory blows from the Chinese government.

For the first quarter of the year, Tencent’s revenue was unchanged over the years, missing S&P Global Market Intelligence consensus projections. However, for 2022, the adjusted operating profit for the quarter declined 15%.

The company’s revenues rose 0.1% year-on-year to nearly 21.1 billion dollars. Its net profit suffered the worst drop since going public in 2004 with a decrease of 51% to 3.4 billion dollars.

Tencent’s business low mostly reflects the damages from its host country’s rigorous regulatory crackdown. Other factors include China’s economic slowdown, the COVID-19 epidemic, and China’s strict policies to overcome it, especially the lockdown in Shanghai.

Gaming

Domestic game revenue fell 1% in the last quarter from a year earlier.

The gaming developer’s worldwide game division barely managed a 4% revenue increase. Tencent has turned to the division for growth while it underwent turbulence in China. The sector climbed to 31% last year.

The company said the measures implemented to prevent addiction among minor players affected the number of paying customers directly and indirectly.

Gaming companies also went through a nine-month hiatus in licensing approvals. Tencent’s titles were not included in the latest batch of licenses issued by the government in April. No new titles have been approved this month yet.

The pandemic spike in user gaming spending waned as many nations returned to normal. On the mainland, the ongoing Zero-COVID policy and Omicron battle have also impeded payments activity.

Advertising

Advertising suffered the greatest, with revenues plummeting 18% year over year. This sector used to be another of Tencent’s most lucrative businesses besides games.

This is directly linked to China’s crackdown on after-school tutoring companies last year. These companies were huge online advertising users, but they have virtually vanished due to the government’s regulatory snares.

The WSJ projected that online advertising will continue to suffer due to China’s economic weakening and the increasing clampdown measures. Last quarter, the segment’s gross margin was 37%, down from 45% a year before.

Stocks

Tencent’s stock has fallen by half from its January peak; 440 billion dollars of its market value evaporated. It comes after China’s regulatory onslaught on big internet corporations’ influence.

At least, after China provided supportive messages to the industry and the market on May 17, the company shares have recovered from their March lows. The WSJ said shares could linger on life support for a period.

The hit from Shanghai

Tencent’s fintech and business services segment’s revenue growth fell to 10% in the first quarter, down from 47% the year before.
The company said its fintech earnings began to dampen in mid-March, driven by the pandemic in Shanghai and its lockdown.

James Mitchell, the company’s chief strategy officer, said the effect was incredibly profound. Many companies’ headquarters were in Shanghai, where advertising budget decisions were made.

According to the Financial Times, Bo Pei, a tech analyst at U.S. Tiger Securities, believes China’s economic instability and pandemic closures are vital reasons Tencent failed in both revenue and profit projections for the quarter.

He said, “Given that lockdowns started in mid-March and are still in place in some cities including Shanghai, Tencent’s second-quarter outlook is even more challenging.”

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