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Tencent Tries to Recover From $200 Billion Antitrust Slide

Tencent Holdings is trying to prove that it on its way to recover from the loss of almost $200 billion suffered because of the antitrust scrutiny.

The results that come as the pandemic recedes affirm this further. The growth in other areas like fintech and the cloud also cushions the company’s growth. But even after all this, it is struggling to get back the market capitalization it has lost since its January peak. This was right around the time Beijing began a clampdown on Jack Ma’s Alibaba Group Holding Ltd. and Ant Group Co. before moving on to rising star Meituan.

Statistics and predictions of growth for Tencent

Tencent has largely escaped the hostilities for now. But questions remain over eventual fallout because of a campaign that is trying to curtail the influence of China’s internet companies. And even in the West, exposing alleged abuses of their power.

But, good results should do the job of assuaging investors. The company is expecting to deliver 24% revenue growth for the March quarter. This is thanks to a strong payments and cloud services recovery, while gaming and other content continue to hook users. Nearly 96% of analysts tracking the stock on Bloomberg gave it a buy rating or equivalent. This is the highest ratio since Beijing kicked off its antitrust campaign in November.

Julia Pan, a Shanghai-based analyst at UOB Kay Hian said, “If there is no regulatory concern, Tencent is very attractive in terms of valuation.”. “It’s a defensive play within the tech sector. Since they don’t need to burn cash for their core businesses like Alibaba and Meituan.”

Here are a few things to watch when Tencent reports earnings after the bell in Hong Kong.

The Elephant in the Room

The Chinese government has yet to single out Tencent in its antitrust drive. But investors haven’t fully dismissed the potential fallout of the sprawling online empire.

Rivals like TikTok-owner ByteDance Ltd. argue WeChat is locking users inside its ecosystem by blocking links to external services. Tencent portfolio companies like Shixianghui and Yuanfudao have been penalized for unfair price tactics and other anti-competitive behaviors. Its music spinoff faces heightened scrutiny over exclusive dealings with record labels. Alarmingly enough, Tencent’s fintech arm, the closest analog to Ant in China, is said to be next in line for increased supervision. Executives will likely again seek to reassure investors. The company has always been cautious with fintech regulations. Hence, it will stick with its normal practice of acquiring minority stakes in startups. “Compliance is our lifeline,” Tencent President Martin Lau told investors in March.

If the major marketers in China, the online tutoring startups decide to dial it down to stay on Beijing’s good side, ad sales could take a hit. For now, Tencent’s fintech and cloud business is expected to grow 41% in the March quarter. This is the fastest in eight quarters, from a low base a year ago when Covid-19 emerged.

That Evergreen Cash Cow

Online games became one of the biggest beneficiaries of a stay-at-home entertainment boom when China went into lockdown in 2020. That’s why this time around, Tencent faces a tough comparison for year-over-year growth. A slower 16% sales increase is projected for its bread-and-butter business. Still, mainstay games like Honor of Kings and PUBG Mobile are topping the charts for global player spending. Despite formidable challengers like miHoYo’s Genshin Impact. Tencent announced a pipeline of more than 40 new titles during its annual games showcase on Sunday. It spent a year carving out slices of at least 31 gaming firms around the world. It’s now trying to churn out new mobile hits. These are based on familiar content including the Japanese manga series One Piece and Digimon.

“Tencent continues to face strong competition from large tech companies such as ByteDance and Alibaba, as well as medium-sized firms such as Lilith Games and miHoYo but is in no immediate danger of losing its market-leading position,” game research firm Niko Partners wrote.

Horse Races

Longer term, investors should also pay attention to the competition.

Tencent is famous for its unforgiving culture of internal competition. It is often compared to a horse race because of its swift and exacting nature. The rival teams compete to develop similar products until one wins out. But it’s finally breaking down some internal walls, so as to better fight externally. The social giant last month did a rare restructure. It folded its mini-video app, video streaming platform, and mobile store into a single business unit. Ross Liang, the former head of the QQ social app, became the new chief executive of Tencent Music Entertainment Group. This came a year after a similar leadership reshuffle at its literature arm. All of this highlights Tencent’s effort to pull together resources to build a Walt Disney Co.-style franchise.

Creators on Tencent’s music apps will share short clips on WeChat’s fast-growing video accounts as in-house platforms work more closely together. Competition is also fierce in cloud services. The pandemic disrupted IT projects but the pace should have picked up last quarter as the world’s No. 2 economies rebounded. Tencent will be keen to make up lost ground in 2021. Huawei Technologies Co. overtook Tencent last year to become China’s No. 2 cloud infrastructure provider, with a market share of 16.3% versus Alibaba’s 35.1%, according to Gartner research.

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