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Tencent's Still Looking for a Win

By Danny Vena - Nov 18, 2018 at 11:59AM

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China's freeze on new video game approvals, and looming new regulations that will cut the time children and teens there spend playing video games, have investors skittish, even as the internet giant's overall results improve.

What started out as a robust year for Tencent Holdings (TCEHY -3.33%) has turned into one filled with challenges. The regulatory environment in China has become plagued with uncertainty, but the social media and gaming giant was able to generate growth and provide investors with hope, despite the odds being stacked against it.

For the third quarter, Tencent reported revenue of 80.60 billion yuan (about $11.72 billion at current exchange rates), up 24% year over year, while profits jumped 30% to 23.33 billion yuan ($3.39 billion). Revenue was in line with analysts' consensus estimate of $11.71 billion, while earnings of $0.35 per share far exceeded expectations for a breakeven quarter. 

It's important to note that Tencent recorded sizable growth in its investments, with the biggest contributor being Meituan Dianping, a Chinese food delivery company that recently went public on global markets. Tencent's portfolio added $1.3 billion to its total net income of $3.4 billion for the quarter. 

Laughing little girl playing video games on sofa.

China is implementing regulations aimed at younger gamers. Image source: Getty Images.

Big trouble with little gamers in China

Investors cheered the results, and Tencent stock rose 5% in the wake of its earnings report, but that was a drop in the bucket compared to the 35% decline the company has experienced so far this year. The company is the world's largest video game publisher, and the ongoing difficulty in its gaming business has had investors on edge.

Those issues revolve around a shakeup in the government agencies that approve video games in China, and the country's temporary freeze on new licenses. No new games have been approved since March. Previously, two Chinese government agencies shared responsibility for game approvals: the National Radio and Television Administration, and the Ministry of Culture and Tourism. That authority now rests solely with General Administration of Press and Publications (GAPP). 

President Xi Jinping has told Chinese government officials to find ways to cut down on gaming by children and teens. In line with that, recently published government documents reveal that the GAPP is moving to "implement controls on the total number of online video games, control the number of new video games operated online, explore an age-appropriate reminder system in line with China's national conditions, and take measures to limit the amount of time minors [spend on games]," according to the South China Morning Post.

Getting ahead of the curve

In response to the anticipated new regulations, Tencent recently announced that it would adopt an identity verification system to allow it to limit playing time for children and teens. Players 12 years old and younger will be restricted to one hour of video game play per day, and their access to games will be disabled after 9 p.m. and before 8 a.m. Gamers between the ages of 13 and 18 will be allowed up to two hours of play per day.

Tencent doesn't think the new rules will have a long-lasting impact on its revenue, according to Chief Strategy Officer James Mitchell. "The system is impacting the time minors spend on the games, which is the intention," Mitchell said. But he also asserted that the "vast majority" of its gaming revenue comes from adult players. 

Beijing China Cityscape.

Beijing China Cityscape. Image source: Getty Images.

Waiting for a comeback

Tencent's wide array of businesses  -- which range from advertising and digital content to cloud computing and payment services -- have been able to produce growth, despite the uncertainty and drags on its biggest unit. A shadow will remain over the company's stock, however, until investors gain some clarity into how long China's moratorium on new games will last, and what the impact will be on revenues once the freeze is lifted.

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