Just a few weeks ago, Chinese videogame and internet technology giant Tencent looked close to cracking the $ 1 trillion valuation. Moving winds out of Beijing could blow that out of reach for quite some time.
Shares have fallen 7.7% in the past two trading days following a Bloomberg report on Friday that the company is likely to be the next big target for regulators while Beijing embraces the country’s internet titans . Chinese regulators surprised investors by braking the first public offering of fintech company Ant Group at the last minute in November. Ant, backed by Alibaba, will now be regulated more like a bank. Tencent declined to consider fintech management issues.
Unsurprisingly, Tencent, which along with Ant controls digital payments in China, could now be under tighter control as well. China’s central bank in January released draft rules governing the region. But compared to Ant, Tencent had been less aggressive in online financial services such as loan or insurance. So tighter financial management would be just as devastating for Tencent than for Ant, as first-time earnings still come mostly from games.
But a tougher scrutiny will still hurt: The online finance industry has been growing rapidly. Morgan Stanley, for example, valued its fintech business at $ 157 billion in its report last week in anticipation of Tencent’s $ 1 trillion valuation. Slower growth and higher capital requirements would mean investors have to cut these high expectations. The two-day fall in Tencent shares has already wiped out $ 65 billion of the company’s market value.
The biggest concern for Tencent is whether the regulatory split will go beyond fintech. A watchdog against China’s trust fined Tencent on Friday for not seeking prior approval for its 2018 investment in an online education app. Other technical companies such as Baidu, Bytedance and Didi Chuxing have been fined. The fine was only $ 77,000 – a cump change for Tencent – but that could be a significant sign for future unions and construction.
Tencent has been very successful in using contracts to diversify outside of its core business. The implementation of a harder trust may affect how Tencent uses WeChat,
TCEHY -7.52%
China’s largest social network with 1.2 billion users, to push some of its latest growth areas such as e-commerce and short videos.
The immediate blow to Tencent seems to be easy to manage, but even under the best of circumstances, regulatory uncertainty will weigh on sectors for some time.
Write to Jacky Wong at [email protected]
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