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What’s Driving Tencent’s Restructuring Efforts?

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Factors plaguing Tencent’s prospects in 2018

Tencent (TCEHY) announced a strategic restructuring upgrade on October 1, possibly in response to the lower earnings growth it saw in its latest quarter, restrictions imposed upon its games, trade war uncertainties, and stock price losses. The stock has fallen 20.7% year-to-date.

Tencent recorded flat revenue growth translating to a double-digit fall in EPS on a sequential basis in the second quarter. The stock fell 7% on August 15 following its earnings release.

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Chinese regulators suspended Tencent’s Monster Hunter: World game on August 13 within a week of its release. Fears regarding acute addiction and gambling drove the suspension, which translated to a stock price fall of 3% for Tencent. The desktop versions of Tencent’s PlayerUnknown’s Battlegrounds and Fortnite games were also held by Chinese regulatory bodies. Tencent has been unable to get a game licensed since March. The Chinese government made another game suspension announcement on August 30, alleging widespread myopia perpetrated by gaming addiction. The stock shed 7% on the day.

All the while, President Donald Trump has continued to announce tariffs on Chinese goods, criticize the devaluation of Chinese yuan against the US dollar, and discourage dependency on China by American companies. These factors have wiped away $190 billion in market capitalization for Tencent in 2018. Baidu (BIDU), Alibaba (BABA), and Tencent have lost a combined $168 billion from their aggregate valuations due to trade war uncertainties and regulatory crackdowns.

Summarizing the restructuring

Tencent derives its revenue mainly from smartphone gaming, online advertising, and social media. The company has decided to reorganize its social network, mobile Internet, and online media groups into the newly conceived platform and content, cloud and smart industries, and advertising and marketing services groups.

The platform and content group will focus on Tencent’s social media platforms, such as QQ, Qzone, YingYongBao, and Tencent Browser. The cloud and smart industries group will concentrate on cloud computing and AI endeavors. The advertising and market services group will take care of Tencent’s advertising operations.

The Tencent technology committee will focus on investments in AI and other high-end technologies. Alphabet (GOOG) and Tencent are rumored to be in discussions over a potential alliance in terms of their cloud computing solutions.

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