Sunday is supposed to be a day of rest. Not last weekend for Tencent, when it announced its first major restructuring for six years.
Maybe the idea was to show a sense of urgency. Part of the plan is a regrouping of some of its existing businesses into a ‘Platform and Content Group’, bringing together its social networking platforms with its news, video and music offerings. That looks like a reaction to rivals like Bytedance, whose recommendation algorithms for news and videos are biting into Tencent’s customer base (see WiC425) and which last week got a pre-IPO valuation from private equity investors of $75 billion.
But the bigger change is the creation of a new division called the ‘Cloud and Smart Industries Group’, which is tasked with building new products for corporate clients in sectors like education, healthcare and smart retail.
This courting of companies is a more radical reboot for its business model. That said, Tencent’s bosses knew they needed to do something bold. Its market value motored past $500 billion at the start of the year, making it the world’s fifth most valuable company. But sentiment has since soured spectacularly, as we discussed in WiC421, with its shares tumbling by a third.
Ground zero is the gaming division, which garners more than a third of its revenues. Here Tencent has run into trouble with regulators, which haven’t approved a new game since March on fears about addiction, especially among younger players.
That is putting more of the onus on WeChat, China’s dominant social networking app, where Tencent wants a better return from the data it collects from more than a billion users.
This is a trend we discussed in last week’s review of AI Superpowers, Lee Kai-fu’s new book on how artificial intelligence is reshaping the commercial landscape (see WiC426). Tencent also wants to deploy data in a more productive way by combining its consumer reach with breakthroughs involving its business customers. Hence Pony Ma, the company’s boss, is promising to “bring consumers and industrial data users together” and he has freed up access to the tech conglomerate’s own AI platform to third-party developers, in the hope of spurring new ideas for products and services.
In the past Tencent profited from an “internal horse racing” mentality that gave its business units the freedom to champion their own ideas for new products, explains Sina Finance. One of the drawbacks was that much of its data got fragmented among competing units. The overhaul is set to sacrifice some of this freewheeling style in favour of a more consolidated, centralised approach.
Along similar lines on Sunday, Tencent announced a new team to coordinate its research efforts on a companywide basis, focusing on areas like AI and quantum computing.
The refocusing on R&D may mean that Tencent turns more inward. That may means its M&A team is less active going forward (it has bought around 600 stakes in other companies). That will please some of its critics, who complain that the investments have been somewhat scattergun and that it should be doing more to bolster its core businesses and rekindle the innovative spirit that created WeChat.
Prior to Sunday’s announcement the deals had flowed. Tencent was a buyer in 31 fundraisings worth $100 million or more in the first eight months of this year, according to CB Insights, a market intelligence provider. That cemented its status as the top investor in Chinese unicorns – tech firms valued at more than $1 billion – with stakes in more than a quarter of these companies.
Back in August, CB Insights also calculated that 12 of Tencent’s punts had gone public since the start of the previous year, giving it an aggregate stake worth more than $20 billion at the time of listing.
The market debuts have kept on coming since then: there was a huge IPO for the delivery giant Meituan last month in Hong Kong and this week Tencent filed for an IPO for its music unit in New York, wanting a valuation of about $25 billion.
Meanwhile its new Cloud and Smart Industries Group could also benefit from some of its investment holdings. In areas like smart retail, for instance, they could help with the transition into enterprise solutions, with investees persuaded to partner with their patron.
Keeping track, Oct 19, 2018: In November last year Tencent took plaudits as the first Chinese firm to pass $500 billion in market value, stoking speculation over whether it would outgrow Apple as the world’s most valuable listed company. Apple shares have since climbed nearly 30%, with the iPhone maker crowned as the world’s first $1 trillion company in August (Amazon has since joined the $1 trillion club too). Tencent has not been able to keep up the pace, however. Indeed, Bloomberg says the internet giant had dipped close to 40% in value from its record highs in January this year, losing $220 billion in market worth. The company’s shares traded lower for 10 consecutive days last week before staging a brief rebound last Friday. Its market value is now about $320 billion, Caixin Weekly notes, dropping it outside the ranks of the world’s top 10 most valuable companies. Tencent’s share price was hit by its first quarterly profit decline in more than a decade (see WiC421) and investor confidence was drained by a $10 billion sale by its biggest shareholder, South African media firm Nasper in March. More fundamental in terms of its challenges is the Chinese government’s clampdown on the online games business this year. Hong Kong newspaper Singtao Daily thinks that global fund flows haven’t helped Tencent’s shares either. While Donald Trump’s economic polices have encouraged US firms to channel some of their overseas capital back to America, Hong Kong – where Tencent is listed – has been hit by capital outflows (see WiC406). So much so that Hong Kong lenders were forced to raise prime lending rates last week – for the first time in more than a decade.
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