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Tencent tries to ease investor fears over US ban as earnings grow

Confident in core China market, tech group 'patient' about its international strategy

Tencent's headquarters in Shenzhen: The U.S. only accounts for a small fraction of the group's top line, executives say.   © Reuters

HONG KONG/NEW YORK -- Tencent Holdings told investors that an imminent U.S. crackdown will have minimal impact on its revenues, after a surprise executive order from President Donald Trump last week wiped tens of billions of dollars off the Chinese tech giant's market capitalization.

Trump's order, which would ban American transactions with Tencent's superapp WeChat by Sept. 15, will not affect its China business because the U.S. accounts for only a small fraction of the group's top line, executives said Wednesday on an earnings call.

"The U.S. represents less than 2% of our global revenue," James Mitchell, chief strategy officer of the Shenzhen-based company, said during the call. "Within that, advertising in the U.S. should be less than 1% of our total advertising revenue."

Prior to the call, Tencent reported strong sales growth but narrowly missed analysts' expectations, with demand for games during the coronavirus pandemic helping to offset rising market competition and the global economic slowdown.

The company's shares opened 3.1% higher in the New York morning.

Trump's vaguely worded executive order, issued Aug. 6, sparked confusion about the scale of the intended crackdown. A White House official last week had to clarify that the executive order will not impact Tencent's video game business, which includes global hits such as Fortnite.

There have also been worries that the ban could force Apple to remove WeChat from its China App Store, which would deal a huge blow to the California smartphone maker as the superapp is a must-have on the mainland.

Pony Ma Huateng, Tencent's chairman and CEO, in his opening remarks on the Wednesday call emphasized the distinction between Weixin and WeChat, which serve the mainland Chinese market and overseas markets, respectively, much like ByteDance's Douyin and TikTok.

On ad sales in mainland China to American companies, Mitchell said "our understanding is that that's not a relevant metric for the discussion at this point in time, because if you look at the [executive orders], they specify quite clearly they have a U.S. jurisdiction, and consequently we don't see an impact on companies' advertising on our platform in China."

Trump's "executive order is focused on WeChat in the United States and not our other businesses," added Martin Lau, president of Tencent.

"In terms of international markets, we do have a long-term strategy of developing an international presence, and we are actually very patient about it," Lau said later in the call.

The company is committed to "protecting the privacy and security of data for our users" and operates "strictly in compliance with the laws and regulations in each one of the countries that we operate in," Lau added.

Hong Kong-listed Tencent logged revenue of 114.9 billion yuan ($16.5 billion) during the April-June quarter, according to its filing on Wednesday, a 29% increase from the year-ago period but lower than the market consensus of 125.9 billion yuan, according to FactSet.

Net profit climbed 31% on the year to 32.5 billion yuan.

Trump's order bans transactions with WeChat, describing the Chinese messaging app as a threat to national security. Tencent, alongside Alibaba Group Holding and Baidu, was also targeted as part of a U.S. "Clean Network" initiative as the Trump administration urged American companies to boycott Chinese cloud service providers.

While some analysts agree that the policy will not deliver a major blow to Tencent, worries have persisted. Shares slipped 10% after Trump's executive order was announced.

"The order as written is so broad that it could end up blocking the ability of any U.S. person or company from working with Tencent, one of the world's largest technology companies," said Dan Wang, an analyst with Gavekal Dragonomics. The U.S. Commerce Department was given 45 days to explain the scope of the ban and how it will be enforced.

"We expect the Commerce Department to focus on WeChat specifically," Neil Macker, a senior analyst with global financial services provider Morningstar, told investors in a research note Tuesday. "However, since the United States is in a presidential election year with the incumbent trailing in the polls, a broader definition and the resultant trade war escalation with China remains a possibility."

Analysts say a sweeping ban against Tencent would wreak havoc on the company's long-term profitability and global ambitions. As part of its efforts to expand beyond China, Tencent has invested in a number of video game studios, including some in the U.S.

"It is unclear what would happen with respect to these sizable stakes if the Commerce Department decides to enforce a broader interpretation of the ban," Macker said.

Online gaming contributed 38.3 billion yuan, or roughly one-third of Tencent's total revenue, in the second quarter of this year, according to the company.

In Hong Kong, shares of Tencent closed up 1.4% at HK$520.50 before the results on Wednesday.

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