Tencent’s Q2 Profits Take Unexpected Hit as Chinese Government Cracks Down on Gaming Business

Profits decline for first time in more than 10 years for tech giant

Last Updated: August 15, 2018 @ 8:28 AM

Tencent, spurred by a regulatory crackdown from the Chinese government on its massive gaming business, reported a surprising drop in Q2 profits for the first time in more than 10 years on Wednesday.

The Chinese tech giant reported a 17.9 billion yuan ($2.6 billion) profit for the quarter, a two percent decline year over year. Revenue increased 30 percent from the same time last year, hitting 73.7 yuan ($10.7 billion), but still fell short of analyst expectations.

It’s “a huge miss,” Shawn Yang, executive director at Blue Lotus Capital Advisors, told the Wall Street Journal.  “The second-quarter results–it isn’t very good.”

Tencent, which relies heavily on video game sales from WeChat, its messaging service with 1.06 billion users, has been stunted by a bureaucratic overhaul within the Chinese government. Since March, thousands of video games have been waiting for approval from Beijing. This been an especially painful blow to Tencent, as it cannot cash in on popular video games like South Korea’s “PlayerUnknown’s Battlegrounds” as it sits in regulatory purgatory.

“From a revenue growth perspective, gaming is a key area of weakness, our biggest game is not monetizable,” Martin Lau, Tecent’s president, said on the company’s earnings call. “This is something that’s a little out of our control, but over time we’ll solve it.”

Tencent’s stock dropped 3.6 percent in Hong Kong on Wednesday following its earnings. This added to an already difficult week for the conglomerate; Tencent took a $15 billion hit to its market cap on Tuesday, after Chinese censors forced the company to stop selling “Monster Hunter: World.” The new game, licensed from Japan’s Capcom, had more than 1 million orders since debuting last week.

Tencent said the game was pulled because the Chinese government had “received a large number of complaints.”