Tencent's growth slows as child gamers switch off under new Chinese laws

Founder Pony Ma reassures all he is proactively embracing new regulatory environment even as numbers take on less rosy hues

After merrily speeding along for years, Chinese web giant Tencent has slowed to its lowest revenue growth since going public in 2004 - a dip that coincided with China imposing a raft of new regulations on its big internet companies.

Revenue growth for Q3 2021 came in at just under ten percent year on year (YoY) landing above ¥142.3 (US$22.2B), but the year before the company produced 35 per YoY cent growth raking in approximately ¥125B (US$19.6B).

"During the third quarter, the Internet industry, including the domestic games industry, and certain advertiser categories, adapted to new regulatory and macroeconomic developments,” said CEO Pony Ma in a Wednesday investors call.

The Tencent CEO was referring to a slew of new regulations such as bans on anti-competitive behaviors, new data protection laws, and a limit on the amount of time minors can spend playing video games - a form of entertainment Beijing labelled “spiritual opium” and therefore allowed only three hours a week for minors.

That restriction matters to Tencent because its Value Added Services business, which includes gaming and social network, has traditionally delivered more than half of Tencent’s total revenue.

Tencent announced from here on out it will distinguish domestic from international gaming revenue in its financial reporting, a move that could help investors further understand the ultimate effects of the regulations.

As expected with Beijing’s gaming crackdown, domestic gaming grew by an unremarkable five percent ¥33.6B (US$5.25B) for the company year-on-year, whereas international games grew by 20 percent year-on-year to ¥11.3B (US1.76B), thanks mainly to the titles Valorant and Clash of Clans.

The company reported minors accounted for 0.7 percent of domestic game time and 1.1 percent of domestic games grossing receipts in September 2021, down from 6.4 percent and 4.8 percent respectively in September 2020.

Tencent's corporate line has always been to put on a brave face and take Beijing’s beating on the chin, and this round was no different.

“We are proactively embracing the new regulatory environment, which we believe should contribute to a more sustainable development path for the industry. In the domestic game market, our industry-leading efforts in fully complying with new regulations significantly reduced minors' game time and spending, fostering a healthier gameplay environment,” said Ma.

Aside from VAS which made up almost 53 percent of Q32021 total revenue, Tencent reported revenues from online advertising, FinTech combined with business services, and an “others” category, which made up 15.8 percent, 30.4 percent and not quite one percent, respectively.

Within “business services” is the company’s cloud computing segment which experienced a healthy but slowing growth.

“Our view is that the dominant trend is companies in China increasingly adopting infrastructure in the cloud, platform in the cloud and software in the cloud, and we think that trend continues with or without a faster or slower macroeconomic environment,“ said chief strategy officer James Mitchell.

“I'd say, at this point in time, we think that Business Services will be less affected by regulation and macro fluctuation than advertising,” said Mitchell.

If his prediction is right, Tencent cloud will grow quickly, as advertising revenue increased by five percent year-on-year for Q32021 to ¥22.5B (US$3.5B), social and others advertising by seven percent to ¥19B (US$2.96), and media advertising by four percent to ¥125B (US$546M). FinTech and business services increased by 30 percent year-on-year for Q32021 to ¥43.3B (US$6.75B), reflecting increased commercial payment volume and digitalization of traditional industries. ®

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