Tencent‘s (OTC:TCEHY) stock has declined about 40% over the past six months. A barrage of negative headlines may have left some investors wondering if they should abandon the stock — or, on the flip side, buy it on the dip. Why is everyone talking about the besieged Chinese tech giant?
The next antitrust target after Alibaba
After China’s State Administration for Market Regulation (SAMR) fined Alibaba (NYSE:BABA) $2.75 billion for anticompetitive behavior in April, many investors assumed Tencent would be the next target.
In late April, Reuters claimed the SAMR was getting ready to fine Tencent $1.54 billion. The government hasn’t dropped that hammer yet, but it’s issued Tencent several smaller fines of 500,000 yuan ($77,400) apiece for previously unapproved investments and acquisitions.
Those fines are light, but they could prevent Tencent from expanding its sprawling ecosystem of games, ads, social networks, cloud services, mobile apps, and streaming services in the future.
Regulatory pressure in the U.S.
Last September, the Committee on Foreign Investment in the United States (CFIUS) started probing Tencent’s investments in American gaming companies — including all of Riot Games, a 40% stake in Epic Games, and 5% of Activision Blizzard — over national security concerns.
In May, Reuters claimed Tencent was still in talks with CFIUS to retain those investments. That uncertainty is troubling, since divesting those stakes would cut off Tencent’s access to Riot’s League of Legends, Epic’s Fortnite, and Activision’s Call of Duty Mobile, which are all core growth engines of its gaming business.
The U.S. also recently passed a law that could delist shares of all Chinese companies — including over-the-counter stocks like Tencent — that don’t comply with new auditing standards within the next three years. That countdown is likely keeping long-term investors away from most Chinese stocks.
Regulatory pressure on WeChat Pay
Tencent’s WeChat Pay holds a near-duopoly in China’s online payments market with Ant Group’s Alipay. However, the Chinese government wants to regulate both platforms more tightly as financial institutions — which could cripple their ability to disrupt traditional state-run banks.
China is also developing a national digital currency, the “digital yuan”, which could flow more freely across apps and payment platforms. China insists the digital yuan won’t ever replace WeChat Pay and Alipay, but its state-backed banks have already launched competing digital yuan wallets that could loosen Tencent and Ant’s iron grip on the mobile payments market.
Fresh competition in the fintech market would throttle the growth of Tencent’s rapidly growing fintech and business services division, which grew significantly faster than its VAS (value-added services) and online advertising segments last quarter.
Banning its merger of Huya and DouYu
Last October, Tencent announced it would merge Huya (NYSE:HUYA) and DouYu (NASDAQ:DOYU), China’s two largest video game streaming platforms, to create a new platform with nearly 300 million monthly active mobile users.
The merger would have created a great promotional platform for its top games and expanded its streaming video presence beyond Tencent Video. Unfortunately, the SAMR blocked the deal in mid-July, claiming the deal would monopolize the esports streaming market.
No more exclusive music for Tencent Music
On July 24, the SAMR forced Tencent Music (NYSE:TME), which controls over 80% of China’s streaming music market, to give up all of its exclusive music licensing rights. Tencent spun off Tencent Music in an IPO in late 2018, but it remains the company’s biggest stakeholder.
Tencent Music previously agreed to sub-license its exclusive songs to its competitors, but it was accused of charging inflated fees. That big setback could give smaller rivals like NetEase Cloud Music a chance to finally catch up.
The temporary suspension of WeChat’s registrations
In late July, Tencent abruptly suspended new user registrations for WeChat, the most popular mobile messaging and Mini Programs platform in China, “to align with relevant laws and regulations.”
That suspension won’t significantly hurt Tencent, since WeChat already serves 1.24 billion monthly active users (most of whom are in China). The vast majority of adults in China already use WeChat as an all-in-one app for payments, online purchases, food orders, ride hailing services, and more — so a brief suspension in “new” user registrations is fairly meaningless.
But the announcement still startled Tencent’s investors, since WeChat is the heart of its advertising businesses. In the unlikely event that WeChat is permanently banned, its ad revenue would plummet.
Its online gaming business could be next
Lastly, China’s state-backed media outlet Xinhua recently posted — then deleted — an article that slammed video games as “digital opium.” Xinhua subsequently revised the article with a softer tone, but Tencent’s stock still tumbled amid fears of another crackdown on the gaming industry.
Back in 2018, Tencent endured a nine-month freeze on new gaming approvals in China as the government reevaluated the industry’s standards. Since then, Tencent has repeatedly implemented tighter playtime restrictions for minors to remain in the government’s good graces.
It’s unclear if China will crack down on its top gaming companies again, but the Xinhua article likely spooked investors, since Tencent generated nearly a third of its revenue from video games last quarter.
The key takeaway
At the beginning of the year, I sold all my shares of Tencent because I believed it would be the next big antitrust target in China. That prediction increasingly appears to be coming true. I would be hesitant about buying this stock — or any other top-tier Chinese tech stock, for that matter — until all these uncertainties are resolved.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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