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Tencent’s digital advertising sales fall for first time as China’s economy wobbles

Beijing has sought to curb the influence Tencent and Alibaba holds over the Chinese economy

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Ma 'Pony' Huateng, chairman and CEO of Tencent Holdings. Photo: Paul Yeung/Bloomberg

Ma 'Pony' Huateng, chairman and CEO of Tencent Holdings. Photo: Paul Yeung/Bloomberg

A staff member at a Tencent booth at the China Internet Conference

A staff member at a Tencent booth at the China Internet Conference

People in the booth of food delivery giant Meituan at the China International Fair for Trade in Services

People in the booth of food delivery giant Meituan at the China International Fair for Trade in Services

The logo of China's Tencent Music Entertainment Group

The logo of China's Tencent Music Entertainment Group

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Ma 'Pony' Huateng, chairman and CEO of Tencent Holdings. Photo: Paul Yeung/Bloomberg

Tencent Holdings logged its first-ever revenue decline after online advertising sales fell by a record amount – underscoring the extent to which China’s worsening economy is hurting its biggest corporations.

The country’s most valuable company slashed 5,000 jobs or nearly 5pc of its workforce. It is the first quarterly drop in staffing seen since 2014 and came after layoffs rippling through the global tech sector finally hit the WeChat operator. Revenue fell a deeper-than-projected 3pc to 134 billion yuan (€19.4bn), while net income also missed estimates, plunging 56pc in the June quarter.

Shifting away from reckless expansion should be good for the industry

Tencent is grappling with a deepening downturn in the world’s second biggest economy – the product of a property slump and ad-hoc coronavirus lockdowns from Shanghai to Shenzhen. The uncertainty is wreaking havoc on businesses in every sector – from advertising to cloud computing and gaming.

Alibaba Group this month also reported its first quarterly revenue drop on record, though the results were better than feared.

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A staff member at a Tencent booth at the China Internet Conference

A staff member at a Tencent booth at the China Internet Conference

A staff member at a Tencent booth at the China Internet Conference

“Tencent has tightened its belt as the Chinese tech industry embraces a downturn,” said Willer Chen, an analyst at Forsyth Barr Asia. “The company’s performance now largely depends on its progress on cost control and operation optimisation.”

Even before the macroeconomic turbulence began, China’s internet industry had resigned itself to a new era of sedate growth after a decade of free-wheeling expansion. Companies like Tencent are focusing on profitability over the market-grab of years past, after a sweeping government crackdown in 2021 wiped more than $1 trillion off their combined market value.

Despite the pressures, there were some positive indicators. Online advertising revenue slid a record 18pc in the quarter, but that was better than analysts feared. And adjusted net income of 28.1 billion yuan was about 15pc above expectations, after stripping out one-time gains or losses from associates including JD.com (the e-commerce operator that Tencent is gradually giving away its shares in).

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People in the booth of food delivery giant Meituan at the China International Fair for Trade in Services

People in the booth of food delivery giant Meituan at the China International Fair for Trade in Services

People in the booth of food delivery giant Meituan at the China International Fair for Trade in Services

Prosus NV, one of Tencent’s biggest backers, was largely unchanged in Europe.

The company, which once relied on a network of investments spanning hundreds of firms to create opportunities and new markets, has since last year signalled it will begin paring stakes in major internet investees, including JD. That may help appease the Beijing government, which has sought to curb the influence Tencent and Alibaba wield over the Chinese economy, through backing hundreds of startups and tech firms.

Tencent is staking a claim on the virtual realm of the metaverse

But Tencent chief strategy officer James Mitchell dismissed a Reuters report that Tencent was in touch with financial advisors about selling all or much of its $24bn stake in food delivery service Meituan. That report “is not accurate” he said in response to an analyst’s question on a post-earnings conference call.

Beijing remains a headache for Tencent. Although regulators resumed approving games in April after a months-long hiatus intended to curb addiction, China’s premier developer has yet to win a nod for a single title this year.

On Wednesday, Tencent said its Chinese gaming business was facing “transitional challenges” including dwindling user spending.

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Given the new realities, Tencent executives have said that international games, cloud software and WeChat video will be their major strategic priorities. The TikTok-style feed inside Tencent’s super-app is the company’s latest hope of countering ByteDance, which is increasingly luring users and marketing dollars to TikTok.

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The logo of China's Tencent Music Entertainment Group

The logo of China's Tencent Music Entertainment Group

The logo of China's Tencent Music Entertainment Group

“Tencent is delivering on what management described as a ‘new industry paradigm’ two quarters ago – where growth slows but margins improve,” said an analyst at Union Bancaire Privée. “Shifting away from reckless expansion and aggressive marketing should be positive for the industry as a whole.”

The fintech and business services segment – which includes cloud – is now Tencent’s fastest growth engine. But cloud revenue suffered a mild decline this year after the company cut loss-making contracts and ventured into services beyond infrastructure.

ByteDance is increasingly luring users and marketing dollars to TikTok

Just like Mark Zuckerberg’s Meta, Tencent is staking a claim on the virtual realm of the metaverse. Tencent has revamped its aging social app QQ with customisable 3D avatars and improved graphics, and is hiring developers to make open-world titles.

But such a push, along with steady investment in overseas game studios, could put pressure on the margins before they come to fruition.

“During the second quarter, we actively exited non-core businesses, tightened our marketing spending, and trimmed operating expenses,” said Tencent co-founder Pony Ma said in a statement. That “should position us for revenue growth as China’s economy expands.”


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