Tencent Troubles In Beijing Lead To Collapse

Tencent Holdings Ltd Chairman and CEO Pony Ma attends a press conference for the company’s full-year results in Hong Kong, China, March 21, 2018. REUTERS/Bobby Yip

HONG KONG, March 15 (Reuters Breakingviews) — The collapse of Tencent (0700.HK) is a radical but simple way to resolve a growing struggle for regulation. The Chinese titan could be in trouble for money laundering and other financial irregularities on its WeChat messaging app, the Wall Street Journal reported on Monday. At the same time, censors are also targeting her video game cash cow, helping to sell out. Singling out the latter would be an easy way to isolate risks from Beijing.

A financial crackdown on the mobile payments division is the last thing Pony Ma’s boss needs in a volatile market. The company is already battling a broader economic downturn and the recent Omicron outbreak in China. Tencent has cleverly avoided the cybersecurity scrutiny and antitrust investigations that have landed companies like Didi Global (DIDI.N) and Alibaba (9988.HK). However, his games have come under the spotlight for causing online addiction and nearsightedness in children. Over the past year, the company’s market capitalization has halved to approximately $400 billion; the stock trades just 17 times its 12-month earnings, less than half the 5-year average, according to Refinitiv, and lower than global video game peers such as Take-Two Interactive (TTWO.O) and Activision Blizzard (ATVI.O). ).

Fencing off your core business can help reduce some of the uncertainty. The regulatory risks for video games are more predictable than, say, in fintech, where China’s central bank has a track record of cracking down on entire industries like peer-to-peer lending and cryptocurrencies.

Tencent has also fixed most of Beijing’s problems, including imposing limits on how much time and money kids can spend online, which executives say is a minimal hit to its bottom line. Citi analysts predict sales in 2021 will be around $27 billion thanks to global expansion efforts, up a respectable 11% from the previous year.

The spin-off crystallizes that value rather than leaving it under the burden of Tencent’s sprawling, under-fire empire that spans the WeChat social network, payments, cloud computing and advertising across multiple platforms. It also helps that the division has limited overlap with those divisions and, as a result of the 2018 restructuring, operates under a separate business group. Breaking up may be the best way forward.

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(The author is a columnist for Reuters Breakingviews. The views expressed are her own.)

CONTEXT NEWS

– China’s Tencent faces a “potential record fine” after financial regulators found its mobile payment network violated anti-money laundering rules, among other things, the Wall Street Journal reported on March 14, citing people familiar with the matter.

– The fine could amount to “at least hundreds of millions of yuan,” the report adds, which is more than typical financial penalties for non-bank payment companies.

– Shares of Tencent in Hong Kong opened down 8% to HK$205.20 on March 15 after falling 9.8% a day earlier.

Edited by Anthony Curry and Katrina Hamlin

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