Hong Kong News

Nonpartisan, Noncommercial, unconstrained.
Saturday, Feb 27, 2021

Analysts say Tencent’s US$22bn in US assets, mainly gaming, could be at risk after Mike Pompeo’s latest remarks

Analysts say Tencent’s US$22bn in US assets, mainly gaming, could be at risk after Mike Pompeo’s latest remarks

Trump sent shock waves across the tech industry last week after signing an order to ban US entities from dealing with Tencent’s WeChat app. Tencent’s assets in the US lie primarily in video games, and uncertainty remains until the executive orders are clarified
Tencent’s US assets worth some US$22 billion could be at risk after comments from US Secretary of State Mike Pompeo that the scope of President Donald Trump’s executive orders could extend beyond the Chinese internet giant’s WeChat app and ByteDance’s TikTok in the US, analysts say.

During a speech in Prague, Czech Republic, on Thursday, Pompeo said the target of Trump’s executive orders could be interpreted as being “broader” than just TikTok and WeChat, according to a report by CNBC.

“So when President Trump made his announcement about not only TikTok, but about WeChat – and if you read it, it’s broader even still than that – is that we’re going to make sure that American data does not end up in the hands of an adversary like the Chinese Communist Party, for whom we have seen data uses in western China that rival the greatest human rights violations in the history of mankind,” said Pompeo.

Trump sent shock waves across the tech industry last week after signing an order to ban US entities from dealing with Tencent Holdings’ super app WeChat and ByteDance’s video-sharing app TikTok from September. The orders call on the US commerce secretary to define the banned transactions. As such, the scope of the ban, including which specific transactions would be cut, remains unclear and analysts have said the orders could be subject to legal challenges.

“Although both the US government and Tencent have moved to allay fears over the gaming business, until the rules are published by the Commerce Department as to exactly what transactions are banned and which are allowed, there’s risk in the uncertainty of how things will shake out,” Bloomberg Intelligence analyst Matthew Kanterman said on Friday.

In response to the executive order issued last week, Bloomberg Intelligence analysts Vey-Sern Ling and Kanterman said that Tencent has at least US$22 billion worth of gaming investments in the US that could be at risk of forced divestment if the presidential executive order banning WeChat is broadened to other assets.

“Riot Games and Epic Games could have accounted for 7 per cent of Tencent's game sales and 6 per cent of its 2019 pre-tax profit, in our calculations,” the analysts wrote in a note on Friday.

Tencent’s US assets lie primarily in video games, whereas WeChat – which is ubiquitous in China – is mainly used by Chinese expats to contact friends and family back home in China and by some businesses.

“Tencent has continued its silent global expansion this year and is now invested in, or has acquired, more than 800 companies, of which more than 70 are dedicated video game companies. Tencent also cooperates with or has invested in eight of the top 10 global game companies,” Daniel Ahmad, a senior analyst from Niko Partners, said in a research note. “With additional scrutiny now on the company, this may impact how Tencent can invest in US game companies moving forward. We do not expect this to impact investments that have already taken place.”

Tencent declined to comment on Friday on Pompeo’s latest statement.

On Wednesday, Tencent posted a 37 per cent increase in second-quarter net profit, beating market estimates. The Shenzhen-based internet giant recorded a net profit of 33.1 billion yuan (US$4.8 billion) in the quarter ended June 30, up from 24.1 billion yuan in the same period last year, aided by steady growth in gaming as well as payments and cloud services.

On the analyst earnings conference call, Tencent chief strategy officer James Mitchell played down the likely impact from Washington’s latest move.

“The US represents less than 2 per cent of our overall revenue … Within that … advertising in the US should be less than 1 per cent of our overall advertising revenue,” he said.

The two Bloomberg Intelligence analysts said Tencent could lose a substantial portion of its sales and profit if it is forced to sell US-based Riot Games and Epic Games.

“The former is responsible for League of Legends (LOL), the No. 4 best-selling title globally in 2019 at US$1.5 billion sales, and the latter developed the world's top-selling title Fortnite, which generated US$1.8 billion revenue globally, according to data from Nielsen,” they wrote.

Quote of the Day

Don't let the fear of losing be greater than the excitement of winning.

Robert Kiyosaki
Related Articles

Hong Kong News