Tencent says more regulations set to come as quarterly profit jumps

By Brenda Goh

SHANGHAI (Reuters) -China's Tencent Holdings said on Wednesday that the internet industry should brace for more regulations and uncertainty, but it believed Beijing ultimately wanted to forge a long-term sustainable path for the sector.

The gaming and social-media giant, which beat forecasts with a 29% jump in second-quarter profit, has been among companies that have borne the brunt of regulatory actions Chinese authorities have unleashed on the tech industry and other sectors.

"There will be short-term uncertainties and there will be a lot of new regulations that will be coming," Tencent President Martin Lau told analysts in a call after the company's results, adding that regulators were "very focused on identifying and rectifying industry behaviours"

He said such regulatory actions should have been expected given how oversight of the industry had been "loose" compared to its size and importance. Tencent felt that it was well placed to "embrace this new environment fully," he said.

"The goal is that the government wants to foster a long-term sustainable path for the industry. The government does recognise its importance on the economic side, on the social side and also the contribution of the industry to global competitiveness," he said.

Executives also emphasized that Tencent was offering its technologies and expertise to companies and public services in an effort to contribute to the economy and society.

In a separate statement published the same day as its earnings report, Tencent announced it would invest 50 billion yuan ($7.71 billion) to promote "common prosperity" in China.

Tencent has been barred from entering into exclusive music rights agreements and saw its $5.3 billion plan to merge DouYu International Holdings Ltd and Huya Inc blocked by China's market regulator last month.

Shares in the world's largest gaming firm by revenue also took a battering after a state media article described online games as "spiritual opium" and expressed concern about their impact on children.

As a result, Tencent temporarily lost its crown as Asia's most valuable company to chipmaker TSMC earlier this week. Its shares are down some 8% since the Aug. 3 article.

Tencent has since announced new measures to reduce the time and money children spend on games, starting with its most popular game, "Honor of Kings." It said in Wednesday's earnings statement the moves went "beyond regulatory requirement."

Players under the age of 16 accounted for only 2.6% of its gross game receipts in China during the second quarter, and Lau said that the company was working with regulators to explore ways in which the total amount of time minors spent on gaming could be capped across all titles in the industry.

Tencent also expects its online advertising revenue to experience a big hit from China's move to ban for-profit tutoring in core school subjects, as such companies reduce spending.

Asked about whether the company was seeing any change in preferential tax treatment, Chief Financial Officer John Lo said tax rebates had been reducing over time but that they expected its 2021 effective tax rate to be around the same level as last year, which was 11%.

Earlier this month, state media said that China should stop giving tax breaks to online video gaming firms.

Net profit for the three months through June came in at 42.6 billion yuan, above a Refinitiv consensus estimate of 34.4 billion yuan, as robust demand for games such as "Honor of Kings" and "PUBG mobile" offset a decrease in revenues from its battle royale title "Peacekeeper Elite".

Profit was also boosted by an increase in the fair value assessment of some of the companies Tencent has invested in.

Revenue jumped 20% to 138.3 billion yuan with sales from mobile games up 13%.

($1 = 6.4841 Chinese yuan renminbi)

(Reporting by Brenda Goh, additional reporting by Josh Horwitz; Editing by Edwina Gibbs, Tomasz Janowski and Mark Porter)