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China’s Big Tech companies cut back on strategic investments

China’s Big Tech companies, from internet giant Tencent Holdings to TikTok owner ByteDance, are paring down their strategic investment units, according to industry sources and publicly available data, in line with efforts to reduce new acquisitions because of Beijing’s continued scrutiny of the sector.

Tencent, which runs the world’s largest video gaming business by revenue and China’s biggest social media platform through super app WeChat, saw some teams from its downsized investment department lay off half of their members, while a number of affected employees were reassigned to other business units, according to three people with knowledge of the matter, who declined to be named because the information is not public.

That personnel adjustment was reflected in the company’s latest investment and acquisition figures, which have headed south. China’s most valuable tech enterprise made just 32 investments and acquisitions in the first half of this year, which accounted for about a quarter of its 129 total transactions in the same period in 2021, according to data from ITjuzi, a market research firm that tracks deals in China’s internet industry.

Shenzhen-based Tencent, which was once thought of as “owning half of the mountains and rivers” in China’s tech industry because of its aggressive investment strategy, declined to comment.

Investments have been more financially important for Tencent, according to Arete Research. It indicated that Tencent’s pre-tax profit from investment, for example, contributed to 63 per cent of its overall income in 2021, compared to 36 and 15 per cent in 2020 and 2019.

“With the collapse in both public and private valuations, investment gains are unlikely to provide a further boost to Tencent’s earnings,” said Richard Kramer, founder of Arete Research and a long-time analyst covering Tencent. “We have long argued that investors should value China’s internet [industry] only on operational parts of businesses, not one-off gains, especially from opaque private stakes.”

Tencent’s shares in Hong Kong closed down 0.71 per cent to HK$335.40 on Wednesday, after the company was once again not granted any new video game licence by regulators, continuing a year-long drought.

With a tech empire that touches the digital lives of nearly all of China’s more than 1 billion internet users, Tencent has been actively investing in a wide variety of companies. These holdings amount to US$130 billion, 27 per cent higher than the year before, according to the company’s 2021 annual report.

In June, Tencent lost US$7.4 billion of its market value in Hong Kong trading after major shareholder Prosus, which is listed in Euronext Amsterdam, announced a plan to trim its stake in the WeChat operator to fund a stock repurchase programme.

Tencent has also cut its shareholdings in various firms. Earlier in June, the company reduced its stake in Hong Kong-listed Koolearn Technology, which is 55.7 per cent owned by China’s biggest private tutoring group New Oriental Education & Technology.

In January, Tencent raised US$3 billion from selling some of its shares in Sea, the Singapore-based tech conglomerate known as Southeast Asia’s most valuable company. In response to Beijing’s antitrust demands, Tencent in December announced that it would offload its US$16 billion stake, the country’s second-largest e-commerce services provider, and distribute those shares as a special dividend to investors.

While there are no explicit regulatory restrictions on most Chinese firms’ external investments, there is a general understanding that Beijing is wary of Big Tech companies’ expansion initiatives, according to another industry source, who also declined to be identified.

That reflects the dilemma that Tencent – along with its other major internet peers on the mainland – face, as they consider pursuing fewer acquisitions and more divestments to abide by Beijing’s stance on Big Tech.

In May, Beijing unveiled a 33-point package of policy items to help get the country’s flagging economy back on track. There are no guarantees, however, that regulators would totally ease up on their crackdowns, especially those targeting Big Tech firms.

Tencent’s latest cutbacks at its investment department comes months after Beijing-based tech unicorn ByteDance dissolved its strategic investment unit, which involved the reassignment of about 100 employees, in response to Beijing’s stand against “irrational expansion of capital”, part of its increased scrutiny of China’s Big Tech companies.

The number of investments and acquisitions by ByteDance dropped to only nine in the first half of this year, compared with 27 deals in the same period in 2021, according to data from ITjuzi.

The market tracker also estimated that investment and acquisition deals made by e-commerce giant Alibaba Group Holding, owner of the South China Morning Post, declined to 14 in the first half from 19 a year ago. Baidu, meanwhile, recorded 22 external investment and acquisition deals in the first half, a modest fall from 24 a year earlier.

Regulators, meanwhile, have remained vigilant for potential violations by Big Tech firms. The State Administration for Market Regulation, for example, announced last Sunday that it had punished Tencent, Alibaba and Didi Chuxing, among others, for failing to report past merger deals for antitrust review.

While the Cyberspace Administration of China has denied issuing guidelines for vetting major investment deals by the country’s Big Tech firms, the Post reported in January that the regulator has a mandate to enhance its supervision of internet firms, and that the agency is exploring how to perform its new role in an effective way. South China Morning Post

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