China Covid Lockdown, Profits Immersed in Regulation

Signboard for Tencent Holdings above an office building in Shanghai, China, March 22, 2022. China’s Tencent reported on Wednesday that its quarterly profits had halved from a year earlier and revenue had stagnated, with consumer, e-commerce and travel businesses responsible for declining advertising spending. For its worst performance since its release in 2004.

Kilai Shen | Bloomberg | Getty Images

BEIJING – Chinese tech giant Tencent Kovid has reported disappointing first-quarter revenue in all major business segments, including a hit on mobile pay from the lockdown.

Shares of Tencent, the largest Hong Kong-listed Chinese stock in terms of market value, traded down nearly 7% on Thursday, dragging down the larger Hang Seng index.

Fintech and business services revenue, the company’s second-largest revenue driver, fell 10.8% quarter-on-quarter to 42.77 billion yuan ($ 6.29 billion) in the quarter ended March 31.

According to Wind Information data, this is the first sequential drop since the 11.5% decline in the first three months of 2020 from the fourth quarter of 2019.

China’s GDP contracted in the first three months of 2020 as cowardly lockdowns were imposed earlier this year across more than half of mainland China.

Since March, the country has tried to control the worst outbreak of the virus in two years, using travel bans and targeted stay-home orders.

“Due to the resurgence of COVID-19 in several Chinese cities, commercial financing activities have been weakening since mid-March 2022,” Tencent said in a statement on Wednesday.

This has “negatively impacted the increase in payments in segments such as transportation, dining services and clothing,” the company said. At the time of the analysts’ call, management had said that the amount in Shanghai had been declining year after year for several weeks, and still had not improved to normal levels, according to a transcript accessed through Refinitive Econ.

Tencent operates WeChat, one of the two most influential mobile payment apps in China. WeChat, locally known as Weixin, is also the most popular messaging and social networking platform in China. Tencent is trying to build a short-video and e-commerce business within the app.

WeChat’s monthly active users domestically and internationally increased by 3.8% to 1.29 billion users a year ago.

On a year-over-year basis, revenue from fintech services grew at a moderate pace, while business services declined, Tencent said, without releasing specific figures.

The overall fintech and business services segment grew 10% year-on-year. But That Factset estimates it missed 3.41 billion yuan and marked a sharp recession from 25% growth in the fourth quarter of 2021.

In all business segments, Tencent’s first-quarter revenue fell 0.12% year-on-year to 135.47 billion yuan – down from a fact-set estimate of 140.82 billion yuan. The profit due to shareholders has decreased by 23% compared to a year ago.

The business segment, which includes gaming, Tencent’s largest source of revenue, generated a disappointing 72.74 billion yuan in first-quarter revenue, up slightly from the previous quarter and a year earlier. This reflects Beijing’s restrictions on licensing new games and the recessionary challenges in the international market.

Tencent owns popular online games such as League of Legends and Honor of Kings.

Upcoming regulatory support

The agency said it expects to get game licenses in the future, but that China will approve fewer games overall.

Looking ahead, China Renaissance analysts predict that online gaming revenue may decline 0.3% year-on-year in the second quarter, and only 0.1% full-year growth.

Beijing has cracked down not only on gaming, but also on the exclusive practices of the country’s internet giants. Instead of the “healthy” development of the so-called platform economy and the growth of the digitization of the economy, the authorities have hit a more moderate tone in recent months.

Chinese Vice Premier Liu He has given some assurances of the latest high-level in the technology sector this week.

Tencent President Martin Lau quoted Liu’s remarks in an earnings call on Wednesday.

“So we can clearly see that from the senior-most level, a very clear support signal has been issued,” Lau said, noting that it will take time to implement.

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The results of the advertising department show another sign of the impact of the Kovid lockdown on the Chinese economy.

The company’s revenue from online advertising fell 18% year-on-year to 18 billion yuan in the first quarter. The drop reflected control over online advertising and “weak demand” in education, Internet services and e-commerce businesses, the agency said.

James Mitchell, Tencent’s chief strategy officer, said the lockdowns in Shanghai had affected the advertising budgets of many multinational corporations in particular, as most of those parties were based in the city.

According to official data released this week, China’s retail sales fell 11.1% in April from a year earlier than expected.

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