Tencent Warns Of More Regulations, Pledges Additional $7.7 Billion For Social Philanthropy Projects

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Tencent Warns Of More Regulations, Pledges Additional .7 Billion For Social Philanthropy Projects

Tencent warned on Wednesday of more regulations aimed at the country’s internet companies as China continues to tighten its grip on a once freewheeling sector. It also pledged to give back more to society to heed President Xi Jinping’s call of common prosperity.

The Shenzhen-based gaming and social media giant, which according to Bloomberg reported its slowest quarterly revenue growth since early 2019, said regulators are focused on “identifying and rectifying” industry misbehaviors, and there will “definitely be short-term adjustments” for different businesses. The company vowed to be fully compliant.

“More regulations should be coming,” President Martin Lau said during a Wednesday analyst call, without elaborating further. “Our attitude during this wave of regulation is that we want to embrace this new environment fully, and we want to establish ourselves as fully compliant.”

A company spokesperson said she had no additional comment. Tencent, in the meantime, announced via its official WeChat account that it will set aside 50 billion yuan ($7.7 billion) for a “common prosperity program,” a philanthropic initiative that provides aid in areas such as education, building out medical infrastructure and helping low-income communities. The move follows its April announcement of a “sustainable social values” program, which includes a pledge of 50 billion yuan for causes such as healthcare, rural revitalization and scientific education.

“This new strategy of Tencent’s is a proactive answer to our nation’s strategy,” the company wrote in WeChat, referring to President Xi’s recent speech outlining goals including achieving common prosperity through means such as “eradicating illegal income” and “reasonably adjusting excessive income.”

Still, Tencent, whose Chairman Ma Huateng (also known as Pony Ma) is the country’s second richest person with a fortune of $43 billion, has come under intense regulatory pressure. The company’s Hong Kong-listed shares have plunged more than 40% since peaking in February, after it was ordered to give up exclusive music rights and faced state media accusations of fostering addiction among minors. Tencent reported a 20% rise in sales to $21.3 billion for the second quarter, while profit increased 29% to $6.6 billion from the same period a year ago.

Revenue from online games such as Honor of Kings, PUBG Mobile and Clash of Clans grew 12% year-on-year to $6.6 billion, compared with an average 36.2% quarterly growth last year, according to Shifara Samsudeen, an analyst at Tokyo-based LightStream Research, who publishes via research platform Smartkarma. While the slowdown is partially due to a high-base effect in 2020, when many stayed at home and played games during pandemic-induced lockdowns, Samsudeen warns of further hits to earnings growth from tightening regulations.

“Tencent has not yet seen the full impact of these upcoming regulations and we believe it is too early to think that Tencent is nearing the end of these regulatory probes,” she writes in a recent research note. 

Shawn Yang, a Shenzhen-based managing director at research firm Blue Lotus Capital Advisors, says Tencent also faces headwinds from China’s crackdown on after-school tutoring companies, which once constituted “major buyers” of advertising on the company’s platform, but are now forbidden from teaching school subjects to students undergoing the country’s compulsory education. He also says Tencent could be more “restrained” when monetizing its online games.

The company imposed new limits on the time and money minors can spend on online games, after an offshoot of the official Xinhua News Agency likened the flagship Honor of Kings battle game to “spiritual opium” and lambasted it for ruining an entire generation. During Wednesday’s earnings call, Tencent said purchases from players under the age of 16 accounted for 2.6% of its China game gross receipts, and it called for industry-wide regulations that consider overall time spent playing online games rather than focusing on individual titles.

“If you look across the industry, and most of the people are – when they have concerns, they’re concerned over minors spending too much time on games as a category,” Lau said. “If we can actually find a way to regulate the total amount of time that’s spent across different games, that would address the problem.”

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