Internet & Tech

Defensive attack

Tencent continues on M&A trail in games sector


Coat was – then wasn’t – available

The shortest deal in history? Earlier this week Burberry unveiled purchasable skins for the popular heroine Yao in Tencent’s mobile game Honor of Kings (one skin featured its iconic trench coat). However, only four days after the announcement Tencent terminated the deal over Xinjiang sanctions (see this week’s “China and the World” for more on this).

Tencent will be hoping another deal it has been working on will be longer-lived, especially as competition among companies in the mobile gaming sector has intensified amid a new wave of M&A among games developers. Last week the tech behemoth announced that it had signed a deal to purchase a further 5% stake in Century Huatong, a Zhejiang-based games publisher for Rmb2.8 billion ($429 million). Tencent will become its second largest shareholder, owning 10% of the company.

Founded in 2005, Century Huatong started life as a maker of automotive parts, going public on the Shenzhen stock exchange in 2011. In 2014, seeing the growth in online gaming, it pivoted away from its roots by acquiring two games companies – Shanghai Tianyou and 7Cool – followed by DianDian Interactive, another games developer.

Subsequently it spun off its car parts business into a subsidiary, focusing on a future as a fully-fledged gaming firm. Tencent topped up an initial holding in Century Huatong to 5% last July and it is now trying to double it again, despite a slide of about a third in Century Huatong’s share price over the last eight months. Part of the motivation for increasing its investment is probably defensive, particularly against Bytedance, which is expanding rapidly into mobile gaming. Just this week, Bytedance announced that it had acquired mobile gaming studio Moonton, known for Mobile Legends, a multiplayer online battle game that is a rival to Tencent hits like Honor of Kings, especially in Southeast Asia.

Bytedance is thought to be paying as much as $4 billion for Moonton in another indication of its determination to challenge Tencent for gaming profits. “These will be Bytedance’s most important couple of years to decide the outcome of their gaming strategy. If they can’t do it now, they never will,” Liao Xuhua, an entertainment sector analyst at Analysys, was quoted as saying in the Financial Times on Wednesday.

In fact, Tencent was busier with mergers and acquisitions in the games space than any other company last year, according to Niko Partners, a sector specialist. It completed 31 investments, a record number of deals and three times more than in 2019. New interest from rivals such as Bytedance has also been forcing a change in approach. Tencent previously preferred to invest in larger companies with commercially-proven hits but the strategy is changing as it makes earlier-stage investments, often with smaller stakes.

“Tencent is in no danger of losing its number one position in the games market, but it is beginning to feel some pressure as other companies have been able to disrupt its grip on the top 10 grossing games chart,” Niko concluded.

In the case of Century Huatong, Tencent is increasing its stake in a more experienced player. But the decision could still have a defensive flavour. “Century Huatong is the holder of some classic IP… and it is also at the forefront of R&D and cloud gaming. But more importantly, Tencent cannot risk sitting on the sidelines in the event that Century Huatong turns to its rivals. All in all, this is a win-win situation: a closer relationship with Tencent empowers Century Huatong, while Tencent’s increased stake makes it harder for Bytedance to expand,” TMT Post theorised.

Tencent was another of the potential buyers for Moonton, putting down a $100 million deposit, Caixin reports. But Bytedance offered a higher price and promised Moonton bosses more freedom in decisionmaking after the acquisition.

A source told Caixin that Bytedance has invested in 20 other game developers, although Tencent often tries to disrupt the deals by coming in with better offers.

Tencent issued its latest earnings statement this week, reporting a 26% jump in sales in the quarter ended in December, with online games revenues growing 29% to Rmb39.1 billion.

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