August 16, 2018 / 1:33 AM / a month ago

Tencent shares hit by profit drop, freeze on new game approvals in China

HONG KONG (Reuters) - 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 fell 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.

Procedures for games approvals in China were already complicated enough with watchdogs for media publication, cyberspace and copyright as well as ministries for culture and information technology all being part of the process.

The situation has become more complex with the government’s decision in March to split the overarching media regulator into two units while transferring some power to the Communist Party publicity department, in a step aimed at strengthening its grip over content and ideology.

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.

The company did secure a license to launch and monetize the Monster Hunter game, its president, Martin Lau, told an earnings call on Wednesday. But it was pulled because its content was “not fully compliant”, he said 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.

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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 closing share price of HK$325.8 on Thursday and analysts 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.

Tencent was founded in 1998 and while its core business is in gaming, which accounts for about 40 percent of revenue, 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.

FILE PHOTO: A sign of Tencent is seen during the fourth World Internet Conference in Wuzhen, Zhejiang province, China, December 3, 2017. REUTERS/Aly Song/File Photo

Reporting by Anne Marie Roantree and Sijia Jiang; Additional reporting by Miyoung Kim in SINGAPORE, Pei Li in BEIJING and Brenda Goh in SHANGHAI; Editing by Edwina Gibbs

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