Billionaire Pony Ma Vows Long-Term Growth For Tencent Amid China Tech Crackdown

Pony Ma, the billionaire co-founder of Chinese web giant Tencent, has vowed to reposition his company for “sustainable long-term” growth, after Beijing’s crackdown on its internet sphere has chopped more than $490 billion off Tencent’s market cap since it peaked at $951 billion about one year ago.

The billionaire, also known by his Chinese name Ma Huateng, said the country’s internet industry is “restructuring” and “shifting to a healthy mode” characterized by technological innovation and social responsibility. The 50-year-old, who is currently China’s third-richest person with a wealth of $38.2 billion, made the remarks during his once-a-year address to global media following Tencent’s release of fourth quarter and annual results. He pointed to continued progress in areas such as international games and an increase in usage of the so-called mini programs embedded within the WeChat instant messaging app.

“We are proactively adapting to the new environment by optimizing cost, increasing efficiency, sharpening our focus on key strategic areas and repositioning ourselves for sustainable long term growth,” he said.

Tencent’s other senior management, including its billionaire President Martin Lau, mirrored Ma’s remarks and vowed staunch support for Beijing’s policies. Lau, for example, described the internet industry as overemphasizing on “zero-sum competition, aggressive marketing, reckless expansion, short-term growth and corporate benefits.”

“As a result, the industry’s growth has become frothy and unhealthy,” he said. “Since early 2021,the internet industry has faced fundamental changes and challenges. New regulations have been introduced to correct misbehavior by industry participants in multiple sectors, and to promote fair competition, user protection and data security.”

Tencent, on its part, is reporting its slowest revenue growth since the company went public in Hong Kong in 2004. Squeezed on multiple fronts amid China’s ongoing campaign to rein in its tech giants, the company’s sales increased just 8% to 144.2 billion yuan ($22.6 billion) in the fourth quarter, while profit attributable to equity holders plunged 25% to $3.9 billion.

Tencent is suffering from China’s prolonged hiatus in gaming approval. Intent to wane minors off addiction, regulators haven’t handed out any new licenses toward the end of last year. The freeze prompted Tencent to focus on implementing minor-protection measures rather than creating new games content, the company said yesterday. Its domestic games revenues grew a mere 1% to $4.6 billion in the fourth quarter, which was largely due to sales from older titles such as Honour of Kings and League of Legends: Wild Rift.

Ivan Su, senior equity analyst at Morningstar, wrote in a Thursday research note that he expects a resumption of game license approvals, which “will accelerate gaming revenue growth in early 2023.”

For now, Tencent is accelerating investment abroad to make up for losses at home. The company has invested in some 40 to 50 overseas-based gaming studios since the second half of 2021, hoping to find promising titles that it could help distribute in key markets such as Europe and the U.S., says Cui Chenyu, a Shanghai-based senior analyst at market research firm Omdia.

And as opposed to mega deals like the company’s 2019 acquisition of an 81.4% interest in Finnish games developer Supercell for $10.2 billion, Tencent’s current investment spree has seen it putting what could be just several million dollars in an emerging studio, according to Cui. The largest deal by size over the past several months is its $1.25 billion acquisition of Britain’s Sumo Group, which appears to have received full regulatory approval this January. For now, international games generated $2.1 billion in sales during the fourth quarter, rising 34% from the same period a year ago.

“Building on our proven success, we have increased our pace in acquiring emerging studios with promising future,” Lau said.

The company also predicts a “warming up” in its advertising business before the end of this year. During the final three months of last year, online advertising sales actually decreased 13% to $3.4 billion, as China’s crackdown on sectors including education and real estate has sharply reduced spending from relevant companies.

But Shawn Yang, a Shenzhen-based managing director at research firm Blue Lotus Capital Advisors, is less optimistic. As Covid-19 cases continue to rise in China, weighing on the economy and affecting every sector from logistics, catering and e-commerce, ad spending could still be restrained.

“There might be an improvement in Tencent’s online ad sales in the second half, but the amount may not be much,” he said.

Amid the current challenges, Lau has said the company would slow down its pace of hiring, meaning Tencent’s total headcount would increase at a much smaller percentage than the double digit growth seen in previous years. He also said the company would pay more attention to rising costs from loss-making businesses such as cloud and long-form video.

“We are progressively implementing initiatives to control marketing and staff costs, and to rationalize our non-core businesses,” Lau said. “We expect results from these initiatives to become apparent from the latter part of 2022.”