What’s behind Chinese giant Tencent’s profit drop?

15 Aug 2018

Image: NAYUKI/Shutterstock

Tencent is showing signs of strain after its first recorded drop in profit in 13 years.

Tencent is China’s largest social media and games company and has been praised for its innovation and booming profits, along with other firms such as JD and Baidu.

Tencent holds the prestigious spot of most valuable firm listed in Asia, according to Reuters. That’s why many were shocked when its profit fell to 17.82bn yuan ($2.59bn) compared to the 19.67bn yuan average 12 analysts had collectively wagered. This is a drop of  23pc from last quarter’s dizzying highs. Tencent has lost around $170bn in market value since January of this year.

What’s to blame?

A freeze on the approval of game licences in China and an overall slow-down in the mobile gaming industry made a considerable dent in Tencent’s earnings this quarter.

Tencent not the only one affected

The industry-wide freeze on approving new games in China has been in place since March. Online games account for nearly 40pc of revenue, so the scrutiny from regulators has injured a vital element of the firm’s business model.

“China’s whole online gaming industry is having some issues – not only because of regulation but also because Chinese gamers are becoming more mature and selective,” Shawn Yang, executive director for Blue Lotus Capital Advisors, told Bloomberg TV.

In its earnings release, the company said: “In China, DAU [daily active users] for our smartphone games grew at a double-digit rate year-on-year, but monetisation per user declined as users shifted time to non-monetised tactical tournament games.”

Regulators stopped the firm from selling a Japanese game from Capcom, Monster Hunter World, earlier in July. Another game, PlayerUnknown’s Battlegrounds (PUBG), is still waiting for approval from Chinese authorities.

In some positive news, Tencent’s video subscription service was up 30pc year-on-year and online advertising revenues rose 39pc year-on-year.

Tencent’s WeChat app gained close to 1.06bn users compared to last year. The company said it is aiming to reinvigorate its gaming strategy, but this may take some time to demonstrate tangible results for worried investors.

Shenzhen, home of Tencent headquarters. Image: NAYUKI/Shutterstock

Ellen Tannam was a journalist with Silicon Republic, covering all manner of business and tech subjects