Mon. Dec 6th, 2021

Tencent missed expectations for third-quarter sales on Wednesday. Revenue has grown at the slowest pace since the Chinese internet giant was launched in 2004. ByteDance, owner of the short video platform TikTok, has become a bigger risk than the oppression of Beijing.

A 13 percent increase in revenue to Rmb142 billion ($ 22.2 billion) was the sixth consecutive quarter of slowing growth. Most importantly, online advertising sales have grown by only 5 percent. Local marketing spending declines. Tencent needs to share fewer ads with smaller competitors that increase their market share.

The move makes sense for advertisers. Tencent’s biggest advantage was the number of eyeballs on its social media platform WeChat. It has about 1 billion users, but is losing its luster. Users are spending more and more time on platforms like Douyin, the Chinese equivalent of TikTok, both of which are managed by ByteDance.

Local trends favor video-based content. Tencent’s music streaming unit was also hit, with paying users in the third quarter, compared to both the previous year and quarter. Catching up will be expensive. There are other limitations: aggressive measures to regain market share from smaller competitors run the risk of attracting new antitrust investigation.

The company’s net margin fell by 4 percentage points to 23 percent. Net revenue of Rmb40 billion was stronger than expected. But it had more to do with gains from investment sales than a recovery by the core businesses.

Tencent has quickly adapted to the government’s restrictions on playtime and online spending by children. Gross revenues from Chinese children fell sharply to less than a quarter of last year’s total. But the limits have reduced regulatory uncertainty.

Investors should not rely too much on the company’s gambling business, which last year accounted for almost a third of total revenue. It remains just one official criticism away from another sharp drop.

The effect of that regulatory risk has been praised for the time being. Shares have recovered since then and are 15 percent higher from a low in August. Tencent’s future course now depends more critically on the online preferences of young people than the government’s disapproval.

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