China’s biggest company is shrinking for first time in almost 20 years

A company that posted double digit growth with its eyes closed for years is suddenly shrinking for the first time.

Tencent headquarters in Shenzhen, Guangdong Province of China. (Photo by Chen Xiaotie/VCG via Getty Images)

Chinese tech giant Tencent on Wednesday posted its first drop in quarterly revenue since going public, as the company grapples with China’s economic downturn, pandemic disruptions and ongoing scrutiny from regulators.

Revenue in the second quarter fell three per cent to $28.5 billion (AUD) compared to the year before, while profits plunged by 56 per cent to $4 billion, an earnings statement said.

Tencent also cut around 5500 jobs down to 110,715 employees by the end of June, the first quarterly decline in workforce since 2014.

Tencent went public in Hong Kong in 2004 and enjoyed double-digit growth for much of China’s decades-long internet boom, dominating the market with instant messaging app WeChat and its roster of games.

But China has spent months cracking down on the video game industry to fight addiction among children, cutting into profits of giants like Tencent and its rival NetEase.

Tencent’s stock price has crashed more than 30 per cent this year.

Beijing started approving new video games again in April after a hiatus, but no Tencent games were on the list, meaning it must rely on older titles like Honor of Kings for revenue.

Tencent said China’s domestic gaming market was facing “transitional challenges”, while the international market was in a “post-pandemic digestion period” as people resumed spending on other entertainment avenues.

A man at Hong Kong's international airport walks past an advertisement for the WeChat social media platform owned by China's Tencent company. (Photo by RICHARD A. BROOKS / AFP)

“We actively exited non-core businesses, tightened our marketing spending, and trimmed operating expenses, enabling us to sequentially increase our non-IFRS earnings, despite difficult revenue conditions,” the company said in the statement.

Around half of Tencent’s revenues came from fintech and business services as well as online advertising, which would position the company for growth when China’s economy expands, the company added.

Online advertising revenue fell a record 18 per cent in the second quarter year-on-year, which reflected “notable weakness in the internet services, education and finance sectors”, the firm added.

“Tencent has tightened its belt as the Chinese tech industry embraces a downturn,” Analyst Willer Chen at Forsyth Barr Asia told Bloomberg News.

“The company’s performance now largely depends on its progress on cost control and operation optimisation.”

Tencent is among the biggest names in China’s tech industry that is still reeling from Beijing’s regulatory crackdown, which began in late 2020 to target anti-competitive practices and put an end to a decade of freewheeling growth.

The regulatory actions have wiped more than $1 trillion off the combined market value of the country’s tech giants in 2021, according to Bloomberg News estimates – though Tencent has retained the crown as China’s most valuable company.

The latest economic slump has further damaged bottom lines for the sector’s biggest firms, with Alibaba Group earlier this month reporting flat quarterly revenue growth for the first time.

The announcement came a day after news broke that Tencent plans to sell all or much of its $24 billion stake in Chinese food delivery giant Meituan.

The Hong Kong-listed shares of Meituan fell more than 10 per cent on Tuesday following the news, while Tencent dipped slightly before recovering.

Earnings data on the company’s performance before its listing on the stock exchange is not publicly available.

– with AFP