Chinese tech giant records first-ever revenue decline

Tencent posted its first-ever quarter-over-year revenue decline as tougher gaming regulations in China and a resurgence of Covid-19 in the world’s second-largest economy hit the tech giant.

Here’s how Tencent fared in the second quarter, compared to Refinitiv’s consensus estimates:

  • Revenue: 134.03 billion Chinese yuan ($19.78 billion) versus 134.6 billion yuan expected, down 3% year on year.
  • Profit attributable to shareholders of the company: 18.62 billion yuan versus 25.28 billion yuan expected, down 56% year on year.

Tencent missed both revenue and profit forecasts. During the quarter, Tencent faced macroeconomic headwinds due to a resurgence of Covid in China and subsequent lockdowns of major cities, including the financial metropolis of Shanghai. Authorities have committed to a “Zero Covid” policy that has caused disruptions in the world’s second largest economy.

The Chinese economy grew by just 0.4% in the second quarter, falling short of analyst expectations. That impacted the company’s fintech, cloud and advertising revenues.

Meanwhile, China’s domestic video game industry has also faced challenges from stricter regulations. Tencent gets about a third of its total revenue from gaming.

Gaming Challenges

Last year, Chinese regulators introduced a rule that limits the amount of time children under 18 can spend playing online games to a maximum of three hours per week and only at certain times.

Regulators have also frozen the approval of new games between July 2021 and April this year. In China, games must get the green light from regulators before they are released and can make money.

China Renaissance analysts said in a note published last month that Tencent launched just three mobile games in the second quarter. Thus, the company relied on its existing popular titles to generate revenue.

Tencent has faced a number of headwinds in 2022, including a Covid-induced slowdown in the Chinese economy and a more difficult gaming market.

Bobby Yip | Reuters

Tencent said domestic games revenue fell 1% year-on-year to 31.8 billion yuan in the second quarter, while international games revenue fell by the same percentage to 10.7 billion yuan.

The Chinese tech giant said the international games market was “going through a post-pandemic digestion period”. During the height of the Covid pandemic and global lockdowns, people turned to gaming for entertainment and companies like Tencent and rival NetEase saw a major boom. But since countries have reopened, people are spending less time playing games and the year-on-year comparisons for companies are hard to match.

Tencent also said the Chinese market was “going through a similar digestion period due to transition issues, including relatively fewer major game releases, lower user spend, and the implementation of minor safeguards.”

The company said the second quarter saw sales decline from some of its long-established hit games such as PUBG Mobile and Honor of Kings.

China’s economic slowdown takes its toll

The resurgence of Covid in China, the lockdowns and the ensuing economic slowdown have seeped into key areas of Tencent’s operations.

Online advertising revenue in the second quarter was 18.6 billion yuan, down 18% year over year.

Tencent also operates one of the largest mobile payment services in China, called WeChat Pay, through its WeChat messaging app with more than 1 billion users. The company also has a burgeoning cloud computing business. It packages the revenues of these two under the banner of ‘Fintech and Business Services’. This segment’s revenue grew 1% year-on-year to 42.2 billion yuan, a slowdown from the previous quarter.

“FinTech Services revenue growth was slower compared to previous quarters as the resurgence of COVID-19 in April and May temporarily impacted commercial payments business,” Tencent said.

Ma Huateng, Tencent’s CEO, said in the company’s press release that trade should pick up as China’s economy begins to recover.

“We generate about half of our revenue from FinTech and Business Services, as well as online advertising that directly contributes to and benefits from overall economic activity, which should position us for revenue growth as the Chinese economy grows,” said Ma.

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