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Tencent’s Reassurances On China’s Tech Clampdown Leaves Investors Unimpressed

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Tencent is feeling the pressure from China’s mounting scrutiny of big internet companies as regulators continue to roll out new measures that could hinder the growth of some of its most promising businesses.

Shares of the Hong Kong-listed web giant have plunged over 20% since their January high, wiping out more than $200 billion in market value as Beijing made clear its intention to clampdown on the once freewheeling internet sector. They edged down another 3% Thursday, even after the company posted a 26% jump in revenue and profits that surged 175% in the fourth quarter that included one-time gains. Chairman Pony Ma, who derives the bulk of his fortune from his stake in Tencent, has lost $14.7 billion in wealth since January.

Tencent has sought to assuage investor concerns by playing down the impact from the government’s campaign that started late last year, when regulators abruptly scrapped the $35 billion initial public offering of billionaire Jack Ma’s Ant Group. With the aim of controlling financial risks, multiple government agencies have since proposed new rules related to digital payments and online lending.

Regulators, meanwhile, want to also promote fair competition by cracking down on monopolistic practices. Pony Ma recently met with officials from the State Administration for Market Regulation, the company acknowledged in a statement, but said it was only one of a series of regular meetings. Tencent’s billionaire President Martin Lau also stressed the importance of compliance during a call with analysts on Wednesday.

“If you look at the operating principles of Tencent, we have always emphasized that we would be fully compliant with rules and regulations,” Lau said in the call. “And now, I think it’s important for us to understand even more about what the government is concerned about, and what the society is concerned about, and be even more compliant.”

When it comes to fintech, Tencent is probably less affected by the tightening regulatory environment than Ant Group, says Zhu Ning, deputy dean at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University. This is because the scale and leverage ratio of its online lending business both trail Ant, meaning it may need less of a revamp to address regulatory concerns ranging from controlling leverage ratios to reducing financial risks.

But its digital payments arm faces considerable uncertainties. The People’s Bank of China, the country’s central bank, announced in January its intention to curb market concentration in online payments. It proposed rules at the time that including non-bank payment entities that have one-third of non-bank payment markets would be summoned for meetings with anti-trust officials and get warned first.

Tencent had 38.8% of China’s third-party mobile payments market excluding banks as of June 30 last year, while Ant Group had 55.4%, according to iResearch. Its payment and fintech business, which Bernstein analysts including Robin Zhu estimates has a valuation of between $105 billion to $120 billion, reported a 29% jump in revenues to 38.5 billion yuan ($5.9 billion) for the fourth quarter from a year ago.

“Regulators are still adjusting how they define the payments market, and this is a big uncertainty for Tencent investors,” Zhu says.

In the meantime, anti-trust regulators appear to want Tencent to open up its WeChat platform to its competitors. E-commerce giant and major rival Alibaba is said to be launching its marketplace for bargains, Taobao Deals, on the messaging platform, which has more than 1 billion users. The two companies have long excluded each other’s services from their sites, as both try to keep users hooked for longer periods of time and prevent them from using outside services.

Shawn Yang, a Shenzhen-based managing director at research firm Blue Lotus Capital Advisors, says hosting Alibaba may only be the first concession Tencent has to make. He says another future threat is the possibility of opening up WeChat to Douyin, the Chinese version of the short video platform TikTok, which is controlled by billionaire Zhang Yiming’s ByteDance. The company sued Tencent in February, alleging in a Beijing court that the latter violated anti-monopolistic rules by blocking Douyin content on WeChat. A Tencent spokesperson said the accusations are groundless and defamatory.

“If people end up sharing Douyin clips via Wechat, then it may mean less time spent on Tencent’s own short video service,” Yang says.

But he ruled out, for now, the potential impact on Tencent’s core online gaming business, which usually accounts for half of its total revenues. “The policy focus on online games is about protecting minors,” Yang says. “And Tencent has been emphasizing that.”

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