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Tencent pins hope on fintech business for revival

The Chinese online platform Tencent posted a 24% increase in the revenue and despite the video games chokehold- one of its major revenue channel- the quarterly profit jumped 30%.

Nov 16, 2018 by A. Alfaro
Tencent pins hope on fintech business for revival

Image courtesy: Tencent Facebook page

The Chinese online platform Tencent posted a 24% increase in the revenue and despite the video games chokehold- one of its major revenue channel- the quarterly profit jumped 30%. Though it surpassed analyst expectations, Tencent recorded its lowest growth in the last 13 quarters. Tencent published its third quarter financial report on November 14.

Tencent has revealed the financial situation of its fintech business for the first time. According to the company, the growth was mainly fueled by payment services, advertising, cloud computing services and digital content. In the third quarter, income from online payment-related business lines jumped to CNY 47.8 billion (USD 6.88 billion).

However, the income from video games decreased by 4% to CNY 25.8 billion (USD 3.71 billion). On September, Tencent underwent a major restructuring. Despite the upgrade, Tencent’s stock kept dropping. Income from video games tapered and its reputation took a hit after the Chinese media started reporting heavily on video game addiction among the populace in the last few months.

The year 2018 also saw Tencent shifting its focus to fin-tech business lines. Wechat, China’s most popular messaging application, rolled out a host of financial products over the last months. It looks like Tencent is trying to replicate the success of Alibaba-backed Ant Financial. However, Tencent failed to get in on the act during the fin-tech industry boom, according to Chinese portal 36Kr. Now, Tencent must face a tighter regulatory environment and a more competitive market.

Last year, Tencent surpassed Facebook to become the fifth most-valued company in the world. On January, Tencent’s share price in the Hong Kong Stock Exchange touched USD 60.73. However, investors lost confidence on Tencent as the share price plummeted to USD 31.92 at the end of October.

Revenue from core business activities has declined over the last two quarters. Spoils from “other business lines” have helped improve the overall bottom line.

Tencent’s video games business was among the worst performers. In the second quarter, Tencent's operating profit dropped by 30% monthly. Revenue from video games accounted for 34.2 %, the lowest since 2015. Back then, Tencent admitted the government regulations had impacted the performance. The regulatory framework not only forced Tencent to withdraw some games from the market, but also affected the development of Game of Aces (王牌游戏), a highly popular video game in China.

Tencent’s advertising business, which took off during the last two years, is also showing signs of weakness. Albeit, the third quarter recorded an uptick in income. In the second quarter, the revenue from advertising fell by 14%.

What is even more worrisome for Tencent is the Internet situation in China. According to the China Internet Network Information Center, mobile Internet users in China reached 788 million by June 2018. According to Tencent’s financial report, QQ’s (Tencent’s messaging app) monthly active users reached 800 million and Wechat users hit 1 billion mark. Evidently, there is not much room for growth in terms of active users.

Short video apps such as TikTok set the trend in 2018. According to Quest Mobile, the short video users grew by 500% from the beginning of 2018. And, Tencent didn’t get any of the action.

The state of play has motivated Tencent to pay more attention to its fin-tech services, especially in the light of the financial report which showed notable revenue increase from “other business lines” including fin-tech business, which recorded a higher income than the online advertisement line.

That’s when Tencent decided to reconfigure the departments and business lines, creating new products, platforms and brands. Now, it offers a series of B2C services such as: payments, bonds, insurance, blockchain technology services and credit. Tencent also has a full stack B2B financial ecosystem. Thanks to its large traffic applications, Tencent has achieved considerable success in the finance field.

Tencent hopes to substitute video games with financial services as the main driver of the company. But it is easier said than done.

According to 36Kr, the key to success in the fin-tech field in China requires a perfect combination of technology, a deeper understanding of the financial market and ideal mergers and acquisitions.

Payment services are Tencent’s major data source for financial services. However, the payment business line is on the verge of peaking. The service rate is low and the deposited funds are subject to more and more strict restrictions. All in all, the outlook is not optimistic.

According to 36Kr, many Tencent work groups involved in the fin-tech services lack an integrated system with common goals. Tencent incorporated the fintech services in the Corporate Development Group (CDG) as part of the upgrade.

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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