Has the Government Crackdown Caught up With Tencent?

While Tencent weathered the Chinese government heavily regulating its big tech companies well for the majority of 2021, the past two quarters saw a sharp decline in gross profit for the tech giant. In Q1 2022, the company only managed to generate $8.4 billion in gross profits, a year-over-year decrease of 28 percent. Even though profits from fintech and business services stayed relatively constant over the past five quarters, Tencent's online advertising and value-added services (VAS) segments saw substantial losses compared to the first quarter of 2021.

As our chart shows, VAS still make up 64 percent of the company's total gross profit in the past quarter. A real evaluation of the subcategories of this rather obtusely named segment is difficult, since Tencent's only releasing the revenue numbers for a few selected divisions. Even though WeChat, the company's super app covering everything from communication to payments, has 1.3 billion monthly users according to company filings, most of the firm's earnings stem from gaming, despite the company integrating government-mandated minor protection measures to curb the time children and young adults spend online starting Q4 2021. Domestic games like Honour of Kings profited from a seasonal upturn and generated $4.9 billion in revenue this past quarter, while international acquisitions like PUBG Mobile contributed $1.6 billion to the revenue stream. Since the associated costs are not divvied up in Tencent's financial reports, it's hard to say which subsegment was the most lucrative for the company all things considered.

As the numbers reflect, the integration of WeChat Pay in some of the apps of tech corporation Alibaba hasn't helped the tech giant to bolster either revenues or profits. Instead, the company "implemented cost control initiatives and rationalized certain non-core businesses" in Q1 2022 to maximize profitability. What this means for the workforce at Tencent, especially with the Chinese government continuing its endeavors to break up tech monopolies in the country, remains to be seen.