In early 2021, Chinese online gaming giant Tencent almost became the second trillion-dollar company in Asia after Saudi Arabian National Petroleum Corporation. But, according to Bloomberg, its shares have plunged 64% since their peak in Hong Kong in January 2021, wiping off $623 billion in market value and setting a global record.
Accordingly, Tencent ceded the throne of China’s largest company to liquor giant Kweichow Moutai. At the end of September, the company was valued at about $5.4 billion less than liquor giant Kweichow Moutai on the Hong Kong market.
Tencent’s decline is the latest example of China’s regulatory crackdown, and bleak growth prospects are battering the country’s tech industry. Like other big tech companies in China, Tencent has to lay off staff as a vital measure to cut costs.
In the first half of this year, most of the Tencent group’s subsidiaries were laying off staff, including Tencent Cloud, the game arm, the advertising arm, and the content arm.
The game unit is Tencent’s core business. The proportion of layoffs in the game unit was about 10%
About 100 people were laid off in the Tencent Sports business, accounting for one-third.
Tencent Cloud, Smart Industries Group, and Platform and Content Group had layoffs, with an overall ratio of about 15%.
Some units of the group faced a layoff proportion as high as 40-50%.
Besides, Beijing’s slow approval of new games and restrictions on playtime for teenagers continued to weigh on Tencent’s profits.
The unfavorable business environment isn’t unique; security issues also worry Tencent.
Various reports have shown that Tencent’s QQ instant messenger was hacked on June 26.
Many users of Tencent’s messenger app took to social media to complain that hackers have accessed their accounts and sent pornographic images and gambling content to their contacts.
Some users expressed their concerns over Tencent’s security. A user retorted, “Don’t be dumb, that center is for stealing your information, not for preventing virus theft or anything like that.”
A day later, Nasper and Prosus, two significant shareholders at Tencent, announced that they would sell their shares in Tencent.
It’s unclear if this statement relates to the hack, but the move is unusual.
Prosus reduced its holding in Tencent by around 2% last April. At the time, Prosus stated that it would not sell additional shares for at least the next three years.
Although, this time, they expected to sell a small percentage of the average daily trading volume of the company’s shares. Yet within a minute in the afternoon of June 27, the market value instantly evaporated over $22 billion. The shares reversed their course in the afternoon, falling from around $51 to less than $49.
Amid that turmoil, Tencent also decided to sell shares in a series of emerging technology companies.
On August 2, it reduced its holdings of Huayi Brothers shares by 54 million at an average price of $0.33 per share. In addition, Tencent lent over 27 million shares by participating in refinancing securities. Thus Tencent’s 81 million reductions in Huayi Brothers accounted for around 2.9% of Huayi Brothers’ total share capital.
Tencent’s investment in Huayi Brothers began in May 2011. At that time, Alibaba founder Jack Ma and many others sold part of their shares in Huayi Brothers through bulk transactions, selling a total of 27.8 million shares at $2.37 per share, accounting for 4.6% of the company’s total share capital.
All of the shares mentioned above were included in Tencent’s bag, and Tencent thus became the fourth largest shareholder of Huayi Brothers. The more significant shareholders are Wang Zhongjun, Wang Zhonglei, and Ma Yun.
Since then, Tencent has repeatedly increased its capital in Huayi Brothers, and by 2015, its shareholding was about 7.94%.
Huayi Brothers is currently an entertainment media company in China. The company integrates the three major business sectors and industrial investment of film and television entertainment, brand licensing, real-world, and internet entertainment.
However, Huayi Brothers’ operations have steadily deteriorated, its performance has suffered losses for four consecutive years, and its stock price has continued to fall. Judging from the price of this reduction, Tencent’s investment in Huayi Brothers has suffered heavy losses.
The next company was Wechat
The Financial Times reported on September 2 that the Shenzhen-based internet firm and owner of the well-known messaging app WeChat had given a strategy internally to divest about $14.5 billion (100 billion yuan) of its $88 billion listed share portfolio.
And the latest was food delivery firm Meituan in the middle of November. Reuters reported that Tencent would return funds to investors through a dividend distribution of its $20.3 billion stake in Meituan. The reason was Meituan’s sales fell for a second straight quarter.
A Tencent staff knowledgeable of the company’s investment plan said, “We can’t keep providing unlimited support. We’re selecting companies that can sustain themselves.”
The individual added that investors requested that Tencent sell its underperforming holdings.
However, there is another reason, the Chinese Communist Party (CCP). Because Tencent has played a role as a backer of internet companies in China, the role has attracted the supervision of monopolistic regulators.
A Shenzhen official pointed out that WeChat prevents users from sharing links to competing services it has invested in. The official said regulators had told Tencent to divest shares in large tech firms.
The Shenzhen official said Tencent had successfully invested in rising tech in China. Tencent needed to contribute by funding businesses in CCP-backed industries.
All of the problems above seem typical for an international corporation like Tencent. But the darkest scenario for Tencent is the risk of nationalization—something that only happens in communist countries like China.
NTDTV, a U.S.-based news outlet, reported that the State Administration for Market Regulation disclosed on its website on October 27 that a new joint venture between China Unicom and Tencent was unconditionally approved.
Some analysts pointed out that the cooperation between the two sides is based on their own needs. For example, Tencent needs China Unicom’s sales channels, while China Unicom needs Tencent’s products, technology, and experience.
The newly established joint venture is focused on content delivery networks and edge computing.
Following the transaction, China Unicom holds a 48% stake in the joint venture, Tencent owns a 42% stake, and the relevant employees have 10%.
All parties claim that the new company does not involve a change in the parent company’s equity. Still, there are worries that Tencent will be nationalized as a private enterprise.
Wu Qiang is an independent political scientist in Beijing. He said that though this is the public-private partnership between large state-owned telecom companies and private enterprises, the era of the CCP’s control of the economy has arrived.
Li Hengqing, an economist in the United States, said that these private enterprises would slowly be cannibalized by large state-owned companies, one by one.
He added that the private companies’ assets would be “mixed and reformed” to state-owned companies, making them “bigger and stronger” and becoming the CCP’s world-class strategic state-owned players.
Bad news continues to come to Tencent since it implemented a new round of layoffs in the middle of November. Four sources familiar with the matter told Reuters that its targets are video streaming, gaming, and cloud businesses.
The cut-offs impact three out of six of Tencent’s business divisions. These divisions are the cloud and smart industries group, platform and content, and gaming-focused interactive entertainment department.