After years as a shoo-in choice for investors, Tencent has been falling out of favour. Its share price has been declining for months and it just posted its first-ever quarterly decline in revenues, with net income falling sharply. Company bosses have been cutting costs but investors are hoping for something more dramatic: billions of dollars of sales involving Tencent’s stakes in other companies.
The speculation is that Tencent could boost returns to shareholders by selling some of its holdings in these other businesses, including listed firms that were worth about $90 billion at the end of the previous quarter.
Doing so might also please the Chinese government at a time when it wants to reduce the reach of so-called ‘platform companies’ across a range of sectors and industries.
Tencent hasn’t sounded keen, however, denying a story in Reuters last month that it was planning to sell its stake in delivery giant Meituan.
Last week it also refuted reports in the Financial Times that it hopes to divest at least Rmb100 billion ($14.5 billion) of its listed equity portfolio, saying that there were no “external pressures” to sell down its positions.
Sellers rarely gain from making it crystal clear they are ‘in the market’, of course. And although Tencent sold about $19 billion of its stakes in JD.com and Singapore-based e-commerce platform Sea at the turn of the year, that was purely a decision to cash in on “over-performing stocks”, it has insisted.
“We have not set any target amount for share reduction. Our investment has always been aimed at bringing substantial returns to the company and shareholders, not reaching a certain amount within any given period,” a spokesperson added in comments cited in the Securities Times.
Yet the Financial Times stuck to its analysis that Tencent is under pressure to sell some of its stakes by quoting remarks from an official at the anti-monopoly agency in Guangdong, the province in which Tencent is headquartered, that more is expected of the social media and gaming giant.
“The company has been very humble when dealing with regulators. Still, we are looking for actual moves like a Rmb100 billion donation [to the poverty alleviation fund] or selling stakes in listed companies,” the insider told the newspaper.
Where might Tencent concentrate if it does choose to sell some of its holdings? It has invested in 1,081 businesses, according to the latest count from CB Insights. But most of the focus in the media is on the listed firms, especially the 14 in which it holds stakes worth $1 billion or more (including Meituan, Pinduoduo, Kuaishou, NIO and China Literature).
Some have already seen their share prices tremble on rumours they could be candidates. Significant sales wouldn’t do much to buoy sentiment in the wider internet sector either, which has seen stock prices recede rapidly over the last 18 months.
Perhaps it was also telling that the fanfare for Tencent’s latest investment came from foreign soil this week, with news that it is spending about $198 million in a complicated deal that doubles its stake in the French game-maker Ubisoft Entertainment.
Analysts said that part of the plan is to introduce Ubisoft’s titles to smartphone gamers in China, although there’s also a chance for Tencent to deepen its presence in overseas markets, where it wants to make more of its sales.
The Ubisoft deal follows on from the $139 million that Tencent has just spent on a stake in Japan’s FromSoftware, for instance, as well as its $1.26 billion acquisition of British game studio Sumo Group last year.
Back at home the context for the gaming firms has been challenging, with Tencent and NetEase – a major rival – both having difficulties getting approvals for the launch of new titles.
In fact Tencent hasn’t secured a single licence to distribute a new title for more than a year and it must also contend with additional restrictions from the government on game time for younger players.
“Tencent and NetEase have built up their gaming business primarily in their home turf China. Now that their home market is becoming increasingly regulated and difficult to operate in, these two companies will accelerate their global expansion strategy,” Tom Wijman, market lead for games at data company Newzoo, told CNBC this week.
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