Tencent to distribute US$20b Meituan stake as dividends; posts Q2 revenue fall

TENCENT Holdings pledged to give away the majority of its shares in meal delivery giant Meituan, as China’s social media leader ramps up plans to reduce its extensive holdings across the world’s largest Internet industry.

Tencent, which had announced plans to pare its stake in online retailer JD.com, will distribute more than 958 million Class B stock in Meituan as a special dividend to existing shareholders.

Tencent announced the move as it reported revenue shrank for the second straight quarter, underscoring the extent to which China’s worsening economy is hurting its biggest private corporations.

The decision marks another milestone in Tencent’s evolution from a sprawling Internet empire with investments across much of China’s tech sphere to a more focused, cost-conscious gaming and social media operator. Its exit from JD and now much of Meituan comes after Chinese leader Xi Jinping imposed a series of withering curbs on the industry in 2021, including restrictions on play time and content.

Tencent executives had previously denied it intended to sell its slice of Meituan, China’s leader in food delivery. The stock to be doled out, valued at about US$19.9 billion, marks about 91 per cent of Tencent’s Class B stake. Apart from JD and Meituan, Tencent also owns part of Kuaishou Technology, Didi Global and Bilibili.

The move marks another retreat for Tencent, which along with Alibaba Group Holding held sway over much of China’s tech sector. 

China’s Internet industry has since made peace with a new era of sedate growth, shifting focus to enhancing profitability from chasing market share after Beijing’s crackdown wiped more than US$1 trillion off their combined market value in 2021. While regulators have eased up on their campaign against tech, the once-freewheeling sector remains saddled by weak consumer spending and strict Covid restrictions.

Tencent’s revenue fell 2 per cent to 140.1 billion yuan (S$27 billion) in the September quarter, compared with the average projection for 141.4 billion yuan. Net income came in at 39.9 billion yuan, versus the 25.2 billion yuan estimate. Shares in Prosus, Tencent’s single largest shareholder, rose in Europe.

Chinese tech shares recovered some of their losses this month, after the Communist Party began pulling back from its Covid-Zero playbook and offered more incentives to the Biden administration to work together. Xi’s shift on those fronts, coupled with perceptions of a renewed focus on reviving the world’s No 2 economy, is spurring speculation that Beijing will begin to unshackle the private sector.

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Tencent remains vulnerable to macroeconomic headwinds. Tighter marketing budgets worldwide and growing competition from TikTok-owner ByteDance are cutting into digital advertising profits. In cloud computing, revenue fell this year as the company works to cut loss-making contracts.

In its core video gaming operations, Tencent has yet to find its next big hit to take up the slack from Honor of Kings, first released in 2015. Only one Tencent game has been approved for domestic launch since Beijing’s censors resumed handing out licences in April.

Tencent is co-developing a new mobile game with Capcom for the Japanese studio’s popular Monster Hunter franchise, in a bid by China’s premier game developer to remake itself for the international market.

The company’s appetite for foreign gaming assets is increasing at a time when it is divesting other assets and spending more judiciously at home. In September, the Shenzhen outfit spent roughly US$300 million to double its stake in Ubisoft Entertainment.

While investors have cheered Tencent’s recent cost-cutting, some are clamouring for faster fixes to its top line than long-term gaming bets. Attention is on growth at its WeChat short video feed, which has yet to fully monetise its content with e-commerce and advertising offerings. BLOOMBERG