Tencent’s 2022 strategy indicates a downsizing of vast tech empire to ride out China’s regulatory storm, fuel new growth

• Tencent may go for more divestments, while chasing fewer acquisitions this year, analysts say
• After selling its stakes in JD.com and Singapore-based Sea, Tencent may opt to unload its interests in Meituan, Pinduoduo and Kuaishou

Chinese internet giant Tencent Holdings may opt for more divestments and pursue fewer acquisitions this year, according to analysts, in the wake of Beijing’s tightened regulation of the country’s Big Tech companies.

Tencent founder, chairman and chief executive Pony Ma Huateng signalled such a low-key future for the company, which runs the world’s biggest video gaming business by revenue and China’s largest social media platform through super app WeChat, during his speech in a year-end meeting with employees and after the firm’s move to offload stakes in e-commerce providers Sea and JD.com.

During that meeting, Ma said Tencent should do its job without crossing any lines and reiterated the firm’s commitment to serve as an “assistant and connector” for the country and society, according to a report by online Chinese media outlet LatePost.

That showed Tencent’s resolve to “follow the laws, keep a low profile, [and] survive [current] restrictions” amid the regulatory storm that has swept China’s technology sector since late 2020, said Chinese equities analyst Ming Lu from Aequitas Research. He indicated that Tencent will continue to divest shares in selected investee companies and slow down corporate acquisitions, especially on the mainland.

Tencent, with a tech empire that touches the digital lives of nearly all of China’s more than 1 billion internet users, has been actively investing in a wide variety of companies. These holdings amount to US$130 billion, with US$80 billion held in publicly listed companies, according to Bloomberg data.

Shenzhen-based Tencent, however, remains under pressure to address issues related to data security and video games, as Beijing seeks to curb the influence of Big Tech firms. China’s market watchdog fined Tencent multiple times last year for failing to disclose past mergers and acquisitions deals.

Last August, Tencent’s music streaming business terminated all exclusive licensing deals with global record labels to abide by an order of the State Administration for Market Regulation (SAMR).

While Beijing hinted at its intention to ease up the crackdown on Big Tech during the annual central economic work conference in December, there are no guarantees. Earlier this month, the SAMR slapped fines on Alibaba Group Holding, Tencent and Bilibili for failure to disclose certain business deals. Alibaba owns the South China Morning Post.

“Regulatory pressure from China’s anti-monopoly push may have played a role in Tencent’s decision to offload most of its JD.com stake,” said Matthew Kanterman, a senior equity analyst at Bloomberg Intelligence, in a research note last week. That may signal a similar course of action for Tencent’s investments in “Meituan, [Pinduoduo] and peers operating in e-commerce”, he said, adding that Kuaishou Technology could be another candidate for divestment.

Tencent has a 15.6 per cent shareholding in e-commerce provider Pinduoduo, owns 19.4 per cent of on-demand delivery services giant Meituan, and has a 21.6 per cent stake in short video app operator Kuaishou.

Other potential candidates for divestment include some portfolio companies gearing up for public listing, including Fortnite developer Epic Games and Chinese social e-commerce app operator Xiaohongshu, according to Kanterman.

In spite of Beijing’s scrutiny, Tencent last year continued to pursue strategic investments, closing 268 deals as of December 24, according to data from information services provider ITJuzi. It said that total was already the highest in Tencent’s history, surpassing the 175 deals the company made in 2020.

Ivan Su, an equity analyst at Morningstar, also expects Tencent to continue trimming its stake in mature investee companies, but dismissed the influence of tightened regulation. He said Tencent has regularly divested its interest in companies over the past three years – averaging 20 billion yuan a year – to lock in profits when the company saw fit to do so.

China’s recent regulatory initiatives targeted certain business behaviour, rather than ownership, according to Su, adding that such actions were not made to clamp down on Tencent’s external investment strategy.

“We are seeing very strong deal flows for Tencent in 2021 and early 2022,” he said. “We do not see anything that will hinder Tencent’s ability to invest at the same pace it did over the past years.”

Author: Iris Deng, SCMP