Tencent Announces Q3 Results Amid Regulations Changes in China

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Tencent Holdings Ltd. (HKG:0700) announced their Q3 earnings for 2018, with revenue and profit up year over year, however, there are some interesting results below when it comes to their gaming division and the direction they are headed.

Tencent Games

Tencent is a digital technology company based out of China, owning 40% of Epic Games (and brought Fortnite to China this summer), 5% of Ubisoft (EPA:UBI), 5% of Activision-Blizzard (NASDAQ:ATVI), a majority stake in Supercell (Clash of Clans), and completely owns Riot Games, (League of Legends). Tencent also partners with Take-Two Interactive helping them bring games to the Chinese market. The gaming division overall saw mobile games increase 7% in revenue year over year, the PC games division declined 15% though.

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They are the largest game company in China and are therefore the most impacted with new regulations. The Chinese government announced in August that they would be approving fewer games for monetization annually in an effort to curb how much time minors spend gaming, Tencent stock fell 5% with the announcement.

Tencent has confirmed they have 15 games awaiting monetization approval from the government and has imposed new regulations across their platform that require identity verification to limit the time and money minors are spending on their games.

Other Businesses

Messaging platforms QQ, Weixin, and WeChat all have user growth up year over year, with a total of 1.7 billion monthly average users combined between the three platforms. These platforms provide increased interactions for the online advertising business Tencent operates. The online advertising business grew 47% year over year from messaging and social platforms, with an emphasis on long-tail advertisers a program that can take information from Weixin Moments and co-operate with local advertisers and Weixin merchants, and is sold as an overall platform. Finally, cloud and payment-related services rose 69% year over year, which correlates well with the increased advertisement rates and average user bases.

Long-Term Focus in Gaming Division

They have spent the last few years expanding their diversification with stakes in global gaming companies and partnering with them to bring games to the Chinese market. In August when the Chinese government changed their policy around games it forced Tencent to change their strategy. Tencent seems to have adapted well and has embraced a partnership with the government to continue their operations in China. The implications for any trade war between the US and China have yet to make an impact, but with ownership stakes in US companies forecasts for Tencent would be difficult to make if any changes to intellectual property occur.