Wechat targeted by chinese authorities

Around 900 million Chinese people regularly used WeChat Pay in 2021. (Image: Shutterstock.com/YueStock)

Chinese tech company Tencent has been the target of government intervention in the past. Now, regulators appear to have turned their focus to subsidiary WeChat. FlowBank's Esty Dwek analyzes the implications of a potential spinoff of WeChat Pay.

Recent reports suggest Chinese regulators are targeting WeChat and want to spin off its fintech arm, WeChat Pay. This could spell further trouble for Tencent, the parent company of WeChat. The company has been hit hard in the past by government repression targeting the online gaming industry.

These measures have not been without consequences for Tencent's stock price. Since peaking in 2021, the company has raised nearly 500 billion. U.S. dollars lost market value. According to Refinitiv, the stock trades at a price-to-earnings (P/E) ratio of 17 – less than half of its own five-year average and far below the P/E of peers such as Take-Two Interactive and Activision Blizzard.

Tencent's stock price suffered badly from regulatory crackdown

"If the government does indeed attack WeChat Pay, the fintech arm of Tencent, it could further fuel the stock market crash", explains Esty Dwek, CIO of FlowBank. That's because Tencent's fintech division – which includes cloud computing services – is its fastest-growing line of business, accounting for about 30% of the company's revenue. Only online gambling generates more revenue.

Serious consequences when WeChat Pay broke away

To gauge what impact increased government regulation could have on Tencent, it's worth looking at another Chinese company: "No one knows better than Alibaba how damaging it is when a company's fintech arm is targeted by the relentless Chinese government", so Dwek. Alipay, Alibaba's payment service, was the main target of the Shared Prosperity program. This cost Alibaba's Ant Group its IPO and had a devastating impact on the company's valuation: before the regulatory crackdown, the company was worth nearly 315 billion, according to Fidelity. 68 billion in July of last year. US dollars.

However, the comparison between WeChat Pay and Alipay only works to a limited extent. Alipay is a separate app that allows users to conduct their financial transactions online. WeChat Pay, on the other hand, is integrated with the WeChat app, which includes online shopping, games and more, in addition to a chat function. "Removing WeChat Pay from this universe would have major consequences for the super app", says Dwek.

According to the expert, the effects of a reorganization would then also be far greater than with the spin-off of Alipay. Synergies within WeChat could be affected, putting the company in serious trouble. Management is trying to appease, arguing that WeChat Pay is first and foremost a transaction platform, not a lender.

Tencent's revenue growth slows

However, Dwek believes it is also possible that Tencent could benefit from separating its businesses. "Delineating its core online gaming business could help the company cushion some of the uncertainty caused by government restructuring. It would also allow Tencent to reduce and diversify the risks of its various businesses", she explains.

Regulatory risks for video games are more predictable than in finance, where the Chinese government knows few limits, he said. In addition, Tencent has already introduced caps to prevent children from spending too much time and money on online games. Although management affirms that the impact on business results has been minor, but revenue growth has slowed sharply.

In addition to government interference in its corporate structure, Tencent faces a potential record fine for anti-money laundering violations through WeChat. According to recent reports, the fine could be several hundreds of millions of yuan – well above the average fines that non-bank financial companies normally have to pay.

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