Tencent turns from buyer to seller in investment pivot

Chinese internet titan Tencent is pivoting from years of aggressive stakebuilding to a focus on divestments as it comes under pressure from investors and Beijing’s recent antipathy towards Big Tech.

As part of an important shift in strategy, the company has outlined a soft target of divesting about Rmb100bn ($14.5bn) of its $88bn listed equity portfolio this year, according to two people familiar with the matter. This would take place depending on market conditions and internal profit targets.

Partial divestments in large Chinese companies such as food delivery service Meituan were in the pipeline, the people said. Meituan was not a top priority for share sales owing to its strong performance, but cutting its stake could help reduce pressure on Tencent from the anti-monopoly regulator, the people said.

A crackdown that began in 2020 has led to nearly 100 deals involving Alibaba and Tencent coming under antitrust scrutiny from Chinese regulators, reversing Beijing’s once laissez-faire approach towards the country’s vast internet sector.

Investors have also pressured the company to divest underperforming assets, a third person with direct knowledge of the matter said, as China’s zero-Covid policies and property crisis batter the economy.

Tencent reported its first decline in quarterly revenues in August, driven by weak advertising and games sales, marking a departure from the days of double-digit growth in its internet businesses that had fuelled the company’s aggressive investment strategy.

Its new approach was not driven by any urgent need for cash, and sale proceeds could be distributed in a variety of ways, including special dividends for shareholders, share buybacks and bonuses for employees, the people said. Two employees who did not wish to be named said they had started receiving stock dividends this year in the form of JD.com shares.

Proceeds in 2022 would contribute to two batches of funds planned by Tencent that will be based on themes espoused by Beijing, including sustainable social values and common prosperity, two of the people said. Tencent promised last year to raise Rmb100bn to support rural revitalisation and help increase earnings for low-income groups in a move that was in step with Beijing’s call for greater corporate social responsibility.

Tencent responded: “We have repeatedly made clear publicly that our Rmb100bn commitment towards our sustainable development initiative is a multiyear initiative that is separate from our investment decisions. There is no timeline for contributions to this fund, which will be made over time, and are not determinative of our investment decisions.”

While Tencent has already begun its divestment drive, one person said the investment team was still deliberating which stakes could be reduced in non-core businesses and at what target price. The Shenzhen-based group owns more than 10 per cent of six large tech companies listed in China and is the biggest investor in Meituan, short-video sharing app Kuaishou and popular question-and-answer site Zhihu.

In January, it offloaded more than $3bn worth of shares in Singaporean internet conglomerate Sea. Last year, Tencent gave out $16.4bn worth of stakes in ecommerce player JD.com to shareholders as a dividend in a surprise move that some saw as the start of the strategy pivot.

Tencent added: “We don’t have any target amounts for divestments. We have always invested with the goal of generating strong returns for our company and shareholders, not according to any arbitrary timeline or target. Nor have we received any external pressure regarding our investment portfolio. In fact, our most recent divestments, JD.com and Sea, were overperforming and generated many multiples on our initial investment. We will continue to make decisions independently and in the best interest of our shareholders over the long term.”

Despite the switch in strategy, Tencent was expected to continue to invest overseas and in strategic growth areas, including enterprise software, video services and the games industry, though more selectively than before, said Fitch Ratings analysts Kelvin Ho and Jia Wen in a report in May.

Additional reporting by Sun Yu in Beijing