Tencent’s Divestment Strategy Puts Cold in China’s Technology Sector

Tencent has reined in its once-aggressive pursuit of Chinese internet companies, sending a chill to an industry already teetering from a regulatory attack.

Shenzhen-based internet giant and owner of the popular messaging app WeChat has internally mapped out a strategy to divest about Rmb 100 billion ($14.5 billion) of its $88 billion publicly traded stock portfolio, according to two people familiar with the case.

The soft target is part of a broader shift by Tencent to cut costs as economic growth slows amid a real estate crisis and zero Covid restrictions in China. The pivot represents a tide change for internet and consumer industry start-ups that are raising with cheap capital from deep-pocketed investors.

“Tencent has been a powerful investment force. Their enormous capital meant they took risks that others couldn’t,” said Li Chengdong, head of internet think tank Haitun in Beijing. “Tencent gave life to the entire venture capital community.”

The company has a larger war chest and longer investment horizon than most venture capitalists and is one of the critical providers of follow-up investment rounds. As a result, changes in strategy will have a knock-on effect across the industry.

Financing for Chinese start-ups has declined. Beijing-based data provider ITjuzi found that fundraising for start-ups fell 38 percent in the first half of the year, while the number of deals fell 19 percent compared to last year.

Lulu Yilun Chen, author of Influential: Tencent’s Story and China’s Tech Ambitionsaid, “Tencent has funneled so much money into start-ups, creating a vibrant ecosystem in which entrepreneurs experimented with business models and competed for market share.”

“That era is over after the regulatory crackdown and Tencent’s focus has shifted with the broader economic slowdown,” Chen added.

Tencent’s move to cut spending and divest large portions of its portfolio is representative of a broader shift in the industry, Li said. “This is an inflection point for consumer and internet businesses.”

Tencent’s investments in listed companies, excluding subsidiaries, amounted to Rmbn 602 billion at the end of June, down from Rmb 726 billion in the same period in 2020, following a defeat in Chinese technology stocks.

“We cannot continue to offer unlimited support. We select companies that can support themselves,” said a Tencent employee with knowledge of the company’s investment strategy.

The person added that Tencent had been asked by investors to divest its underperforming assets and that the shift was testing the limits of the investment team. “We need to think in a way we’ve never thought before,” said the employee.

Tencent’s outrageous role as a mainstay of China’s Internet companies has caught the attention of regulators, who have sought to break the monopolistic hold of the country’s top tech titans.

The company is the largest investor in Meituan, e-commerce giant Pinduoduo, online brokerage Futu and video sharing app Kuaishou.

A Shenzhen official who works for the local branch of the anti-monopoly agency said Tencent used the combined power of its universal messaging app WeChat and its deep pockets to support its portfolio companies.

“Consumers are paying the price for how Tencent has created a protective ecosystem for its portfolio companies,” the official said, pointing to how WeChat prevented users from sharing links with the competitors of services it had invested in. The official said regulators had ordered Tencent to divest stakes in major tech companies.

Tencent said: “We [have not] some outside pressure in relation to our investment portfolio. . . We will continue to make decisions independently and in the interest of our shareholders in the long term.”

An official at the office of the Antimonopoly Bureau in Guangdong involved in investigations into Tencent’s sprawling technology empire said: “Tencent has a monopoly on gaming, instant messaging and entertainment. The company has been very humble in dealing with the regulators. Still we are looking for actual moves like a donation from Rmb100bn [to the poverty alleviation fund] or selling interests in publicly traded companies.”

Tencent plans to scale back stakes in companies including e-commerce player JD.com and Meituan, a member of the investment team said. Two knowledgeable people said Meituan wasn’t at the top of the investment team’s sell list.

“In the coming months, Tencent will continue to conduct sales of publicly traded shares, including but not limited to Meituan,” said one knowledgeable person. Their views were shared by two members of Tencent’s investment team.

Reuters previously reported that Tencent plans to sell all or most of its $24 billion stake in Meituan. Tencent said during an earnings call in August that the report was “inaccurate.”

Tencent added: “We do not have any divestment targets. We have always invested with the goal of generating strong returns for our company and our shareholders, not according to any arbitrary timetable or target.”

Investments in China’s technology sector have not completely stopped. In August, Tencent’s corporate venture arm invested in agricultural, robotics, semiconductor and vaccine technology companies — all sectors Beijing singled out as critical to the country’s drive to become self-sufficient in science and technology.

The Shenzhen official said Tencent’s success in investing in China’s booming technology growth meant the company had to contribute by financing companies in government-backed sectors.

“Tencent should take some responsibility,” they said, adding that the company is “less able to benefit from this change in investment strategy.”