Breakingviews – Tencents Beijing woes make case for breakup – Reuters.com

Tencent Holdings Ltd Chairman and CEO Pony Ma attends a news conference announcing the company’s annual results in Hong Kong, China March 21, 2018. REUTERS/Bobby Yip

HONG KONG, March 15 (Reuters Breakingviews) – A Tencent (0700.HK) breakup is a radical but simple way to address mounting regulatory battles. The Chinese titan may be in hot water over money laundering and other financial breaches on its payments-to-messaging WeChat app, the Wall Street Journal reported on Monday. At the same time, censors are also targeting its video-games cash cow, adding to a selloff. Spinning off the latter would be a straightforward way to isolate risks from Beijing.

A financial crackdown on its mobile payments arm is the last thing boss Pony Ma needs amid volatile markets. The company is already grappling with a broader economic slowdown and China’s recent Omicron outbreak read more . Tencent has deftly sidestepped the cybersecurity probes and anti-trust investigations that have ensnared peers like Didi Global (DIDI.N) and Alibaba (9988.HK). Its games, though, have been in an awkward spotlight for causing online addiction and myopia among kids. Over the past year, the company’s market capitalisation has halved to roughly $400 billion; the stock trades at just 17 times forward 12-month earnings, less than half its own 5-year average, per Refinitiv, and below global video-games peers like Take-Two Interactive (TTWO.O) and Activision Blizzard (ATVI.O).

Ring-fencing its core business might help ease some of the uncertainty. The regulatory risks for video games are more predictable than, say, in financial technology, where China’s central bank has a track record of stamping out entire industries like peer-to-peer lending and cryptocurrencies.

Tencent has also addressed most of Beijing’s concerns, including enforcing caps on how much time and money kids can spend on online games, at what executives say is a minimal hit to its bottom line. Thanks to global expansion efforts, the business is forecast to generate roughly $27 billion in sales in 2021, up a decent 11% from the previous year, according to analysts at Citi.

A spinoff would crystallise that value, rather than leaving it weighed down by Tencent’s sprawling, under-fire empire that spans its WeChat social network, payments, cloud computing and advertising across various platforms. It helps too that the unit has limited overlap with those divisions, and as a result of a 2018 restructuring operates under a separate business group. Breaking up may be the best way forward.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

– China’s Tencent is facing a “potential record fine” after financial regulators found its mobile payments network had violated anti-money laundering rules, among other things, the Wall Street Journal reported on March 14, citing people familiar with the matter.

– The fine could be “at least hundreds of millions of yuan”, the report added, larger than the typical financial penalties for non-bank payment companies.

– Tencent’s Hong Kong shares opened down 8% at HK$205.20 on March 15 after falling 9.8% the day before.

Editing by Antony Currie and Katrina Hamlin