Tencent’s divestment strategy chills China’s tech sector

Tencent has reined in its once-aggressive pursuit of Chinese internet companies, sending a chill through an industry already reeling from a regulatory onslaught.

The Shenzhen-based internet giant and owner of popular messaging app WeChat has laid out an in-house strategy to divest about Rmb100 billion ($14.5 billion) from its Rmb88 billion listed equity portfolio. dollars, according to two people familiar with the matter.

The soft target is part of a broader shift by Tencent to cut costs as economic growth slows amid a housing crisis and zero-Covid restrictions in China. The pivot represents a sea change for start-ups in the internet and consumer sectors raised on cheap capital from deep-pocketed investors.

“Tencent has been a powerful investment force. Their vast capital meant they took risks that others couldn’t,” said Li Chengdong, head of internet think tank Haitun in Beijing. life to the entire venture capital community.”

The company has a larger war chest and a longer investment horizon than most venture capitalists and is a leading provider of tracking investment cycles, meaning changes in its strategy have a ripple effect across the industry.

Funding for start-ups has declined. Beijing-based data provider ITjuzi found fundraising for start-ups fell 38% in the first half of the year, with the number of deals down 19% year-on-year. last.

Lulu Yilun Chen, author of Empire Influence: The Story of Tencent and China’s Tech Ambitionsaid, “Tencent funneled so much money into startups, creating a vibrant ecosystem where entrepreneurs experimented with business models and fought for market share.”

“Those days are over after the regulatory crackdown and as Tencent’s focus has shifted with the broader economic downturn,” Chen added.

Tencent’s decision to cut spending and divest a large portion of its portfolio is representative of a broader shift in the industry, Li said. “This is an inflection point for consumers and internet companies,” he said.

Tencent’s investments in listed companies, excluding subsidiaries, stood at Rmb602 billion at the end of June, up from Rmb726 billion in the same period of 2020, following a rout in Chinese technology stocks.

“We cannot continue to provide unlimited assistance. We select companies that can support them,” said a Tencent employee familiar with the company’s investment strategy. They added that Tencent had been asked by investors to divest its underperforming assets, and that the change was testing the limits of the investment team: “We have to think in a way that we don’t. never thought of before,” the employee said.

Tencent’s outsized role as a backer of Chinese internet companies has drawn the attention of regulators, seeking to break the monopolistic grip of the country’s biggest tech titans.

The company is the biggest investor in food delivery giant Meituan, e-commerce titan Pinduoduo, online brokerage Futu and video-sharing app Kuaishou.

You see a snapshot of an interactive chart. This is probably because you are offline or JavaScript is disabled in your browser.

A Shenzhen official working for the local branch of the antimonopoly agency said Tencent is using the combined power of its WeChat universal messaging app and deep pockets to support its portfolio companies.

“Consumers are paying the price for how Tencent has created a protective ecosystem for its portfolio companies,” they said, pointing out how WeChat prevented users from sharing links to competitors of services it had invested in. The official said regulators had asked Tencent to divest stakes in major tech companies.

Tencent said, “We [have not] received no external pressure regarding our investment portfolio. . . We will continue to make decisions independently and in the best interests of our long-term shareholders. »

An official from the antimonopoly agency’s Guangdong office, involved in investigations into Tencent’s sprawling tech empire, said, “Tencent has a monopoly on games, instant messaging and entertainment. The company has been very humble in its dealings with regulators. Yet we are looking for real moves like a donation of 100 billion Rmb [to the poverty alleviation fund] or sell stakes in listed companies.

Tencent plans to trim its stakes in companies including e-commerce player JD.com and food delivery service Meituan, a member of the investment team said. Two people with knowledge of the matter said that Meituan was not at the top of the investment team’s sell list.

“In the coming months, Tencent will continue to execute listed stock sales, including but not limited to Meituan,” a person with knowledge of the matter said. Their views were echoed by two members of Tencent’s investment team.

Reuters previously reported that Tencent planned to sell all or part of its $24 billion stake in Meituan. Tencent said on an earnings call in August that the report was “not accurate.”

Tencent added, “We don’t have target amounts for divestments. We have always invested with the goal of generating strong returns for our business and our shareholders, not according to an arbitrary timetable or target. »

Several people with knowledge of the matter said Tencent intended to sell some of its Meituan shares to appease regulators, but the company was not at the top of its divestment priorities. “Meituan has achieved good results compared to other companies. It can sustain itself,” one individual said.

Investments in China’s tech sector have not come to a complete halt. In August, the venture capital arm of Tencent invested in agricultural, robotics, semiconductor and vaccine technology companies – all sectors designated by Beijing as essential for the country’s drive to become self-sufficient in science and technology. technology.

The Shenzhen official said Tencent’s success in investing in China’s booming tech growth meant the company now had to contribute by funding companies in government-backed sectors.

“Tencent should bear some responsibility,” they said, adding that the company “may benefit less from this change in investment strategy.”

Lance B. Holton