Tencent suffers first-ever drop in quarterly revenue

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Image Source: Indian Today

The absence of game approvals and rules that restrict playing time, as well with COVID-19 lockdowns and a weak economy that reduced ad revenue, all contributed to China’s Tencent reporting its first-ever quarterly sales decline on Wednesday.

Tencent fell short of revenue and profit projections. In addition, Tencent experienced macroeconomic challenges throughout the quarter due to COVID’s revival in China and the ensuing city-wide lockdowns that followed, including Shanghai’s financial hub. The “Zero COVID” policy adopted by the authorities has disrupted the second-largest economy in the world.

Analyst estimates were not met by China’s second-quarter economic growth of just 0.4%. This impacted the company’s finance, cloud, and advertising revenues.

Meanwhile, China’s domestic video game market has encountered difficulties with greater regulation. Gaming generates nearly a third of Tencent’s overall income.

As Beijing’s crackdown on major digital businesses, which started in late 2020, restrains its growth, the decline represents a low point for the gaming behemoth and owner of the WeChat messaging network, which had reported double-digit growth virtually every quarter since it went public in 2004.

According to Reuters, Tencent (TCEHY) intends to sell most or all of its $24 billion holding in food delivery company Meituan to appease domestic regulators.

According to the corporation, revenue for the three months ending June 30 fell by 3% to 134 billion yuan ($19.78 billion) from 138.3 billion yuan a year earlier. Analysts anticipated the drop.

Below analysts’ expectations of 25 billion yuan, net profit attributable to equity holders decreased by 56% to 18.6 billion yuan.

In response to data showing a downturn in demand in July and signs that the world’s second-largest economy is having trouble recovering from the growth blow that severe COVID controls caused in the second quarter, China reduced crucial lending rates on Monday to boost demand.

For the first time in its history, e-commerce behemoth Alibaba (BABA) reported flat quarterly revenue growth earlier this month.

Sources claim that Tencent has been lowering its stakes in portfolio businesses to please Chinese regulators and take advantage of these bets’ substantial earnings.

Since its peak in February 2021, the Shenzhen-based company has lost about 60% of its market value as a result of Beijing’s regulatory campaign intended to limit the dominance of major internet enterprises. Nevertheless, the $373 billion business has maintained its position as the most valued in China.

Online game revenue, a major source of Tencent’s profits, fell by 1% both domestically and internationally. After briefly halting approvals, Chinese regulators have still not granted Tencent a new game license. On the other hand, WeChat generated more income from its video content, which helped its social network services post a 1% gain in revenue.

WeChat video revenue, according to Shawn Yang, manager director of Blue Lotus Capital Advisor, “maybe its major growth engine in the immediate future.”

As advertisers continue to be frugal with their spending, Tencent recorded 18.6 billion yuan ($2.74 billion) in ad income in the second quarter, a decline of 18%. However, Yang argues that this was not as catastrophic as some analysts had predicted.

New gaming laws affecting Tencent

Chinese authorities implemented a rule limiting the amount of time minors under the age of 18 could spend playing online games to a weekly maximum of three hours and only during particular hours last year.

Regulators also put the approval of new games on hold from July 2021 to April of this year. Before a game is published and becomes monetizable in China, regulators must give the game the all-clear.

Analysts at China Renaissance said that Tencent only released three mobile games in the second quarter in a report that was published last month. As a result, the business has relied on its already-popular titles to bring in money.

The worldwide gaming market “had a post-pandemic digestion period,” according to the Chinese technology behemoth. People resorted to gaming for pleasure during the height of the COVID outbreak and the worldwide lockdowns, and businesses like Tencent and rival NetEase had a huge rise. However, since nations have resumed operations, consumers play fewer games, and businesses find it challenging to meet year-over-year comparisons.