Tencent shares hit by profit drop, murky outlook for China game approvals

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HONG KONG (Aug 16): Shares in China’s Tencent Holdings lost more ground on Thursday after it logged its first quarterly profit decline in nearly 13 years and said it did not know when it would get Chinese approval to make money off its most popular game.

The disappointing earnings results have highlighted the impact of a freeze on new China approvals for the gaming industry since March due to the restructuring of related regulatory agencies in the world’s biggest gaming market.

Reporting a 2 percent decline in second-quarter net profit as well as its slowest revenue growth in three years, Tencent said the biggest hurdle to a return to rapid revenue growth was that it could not yet charge for its PlayerUnknowns’ Battlegrounds (PUBG) video game in China.

Shares in China’s largest social media and gaming company dropped 3 percent, adding to a painful slide earlier this week after its blockbuster title “Monster Hunter: World” was pulled in the country due to regulatory complaints.

Gaming revenue accounted for 40 percent of Tencent’s total revenue in the quarter.

China has a complex approvals process for games and while PUBG can be played as a free game, Tencent has yet to receive the nod to monetize it. PUBG is a popular battle game with more than 400 million players worldwide developed by Tencent’s South Korean partner and investee company Bluehole.

Tencent was forced to pull “Monster Hunter: World”, a popular game worldwide, four days after its China launch. Company President Martin Lau told an earnings call on Wednesday the content was not fully compliant without elaborating.

This is not the first time Tencent’s games have come under scrutiny from regulators. In July last year, China’s communist party mouthpiece, the People’s Daily, criticized Tencent, describing its “Honour of Kings” game as poison and called for tighter regulatory controls of online games.

While many analysts have moved to cut their target prices for Tencent’s stock this week, they were broadly upbeat about the firm’s longer-term outlook.

“We consider the disruption to the game business to be temporary and primarily due to licensing suspension amid regulatory uncertainties; the business remains structurally intact, in our view,” Daiwa Capital markets analyst John Choi said in a client note.

Choi cut his price target to HK$400 from HK$490 but maintained his “buy” rating.

Fifteen analysts have lowered their target price on Tencent since Wednesday. The average price of 41 analysts fell to HK$487.59, or down 6 percent over a month, according to Reuters data. But that remains far above Tencent’s share price of HK$326 in Thursday afternoon trade.

“Fundamentally, the business is as strong as it has ever been, in our view, and management says that it is working on various initiatives to reinvigorate growth as soon as possible,” Renaissance Capital said in a research note.

Tencent was founded in 1998 and while its core business is in gaming, it also operates China’s dominant social network, WeChat, which has more than 1 billion users.

Its shares have declined 12 percent so far this week and have lost a third of their value since hitting a record high in January as investors fret about growth momentum. Even so, it remains the biggest listed firm in Asia with a market capitalization of nearly $400 billion.

Other gaming shares were hit in the wake of Tencent’s downbeat results, including Chinese rival NetEase which lost 4 percent while Japan’s Capcom, which developed “Monster Hunter:World” tumbled 5 percent.

South Africa’s Naspers, which owns a 31 percent stake in Tencent, saw its stock lose 8 percent.