Investment becomes Tencent's main profit driver in 2021
Investment accounted for the bulk of Tencent Holdings' annual profit for the first time in 2021 as the Chinese technology giant saw earnings from its core business contract in the second half of the year.
The company posted CNY 560.1bn (USD 87.9bn) in revenue and CNY 227.8bn in net profit, year-on-year gains of 16% and 42%, respectively. However, nearly two-thirds of the profit - or CNY 149.5bn - was attributed to "other gains," a category dominated by investment-related activity.
Other gains came to CNY 57.1bn in 2020, which equated to 36% of overall net profit, according to Tencent's annual report.
The swing in fortune coincided with a regulatory crackdown on China's internet giants that was expected to curb third-party investment ambitions. This included anti-monopoly investigations aimed at stopping the likes of Alibaba Group and Tencent forcing start-ups to use them as exclusive distributors in return for funding.
Yet at the same time, Tencent has been shifting its core operations toward business services. Most of the regulatory actions targeted consumer-facing internet players. Revenue grew just 8% year-on-year in the last three months of 2021, while net profit declined by 25%. This was the second consecutive quarterly decline in profit.
On annual basis, gaming, social networking, and online advertising still accounted for more than two-thirds of revenue. However, gaming and social networking and online advertising posted growth of 10% and 8%, respectively. For business services and financial technology - such as communication and collaboration services WeCom, Tencent Meeting, and Tencent Docs - it was 34%.
In the fourth quarter alone, fintech and business services increased 25% year-on-year; this compares to 7% for gaming and social networking and a 13% decrease for online advertising.
Most of the "other gains" in 2021 came from three deals. Tencent pared its stake in JD.com from 17% to 2.3%, distributing the CNY 78bn in proceeds to shareholders as a dividend. It is no longer the e-commerce company's largest shareholder.
The other two exits were from an undisclosed game developer and the privatisation of search engine Sougou, which saw the company switch from an investee to a subsidiary. The gains were CNY 11.6bn and CNY 3.8bn, respectively. Value adjustments of other holdings contributed CNY 47bn, compared to CNY 37.2bn in 2020.
Even if the JD.com exit is dismissed as a one-off, "others gains" still represent 48% of total profit. However, further disposals cannot be dismissed, especially as the JD.com transaction is said to have been driven by pressure surrounding the anti-monopoly probes.
Tencent is the largest shareholder of online-to-offline services platform Meituan and short video business Kuaishou, and the second-largest shareholder in e-commerce platform Pinduoduo, video-sharing site Bilibili, and real estate portal KE holdings. It is also the third-largest shareholder in ride-hailing platform Didi.
Tencent has about 1,200 portfolio companies. It said on its earnings call that more mature investments would be exited in favour of bets on emerging businesses.
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