China Markets

China's Tencent falls 3% after disappointing earnings and scrutiny from Chinese regulators

Key Points
  • Tencent's stock fell around 3 percent in Thursday morning trade following a quarterly earnings report that missed analysts' expectations.
  • The news comes days after the Chinese tech giant halted the sale of the video game "Monster Hunter: World" due to complaints raised by regulatory authorities.
  • Analysts, however, say the pain felt by the company as a result of regulatory challenges is likely to be "short-term."
A flag bearing the Tencent logo is displayed alongside a Chinese flag outside the company's offices in Beijing, China.
Giulia March | Bloomberg | Getty Images

Tencent's stock was in focus after the company posted a quarterly earnings report on Wednesday that missed analyst expectations.

Thursday morning trade saw the Chinese tech giant's Hong Kong-listed stock sliding around 3 percent following the news. The company's profit for the quarter ending in June dipped 2 percent to 17.87 billion yuan ($2.59 billion), which was weaker than analysts had anticipated. That was also the first decline in profit for the company in almost 13 years.

"The disappointment will be broad based from these results, particularly in a market that's still sensitive to the downside globally at the moment," said Douglas Morton, head of research at Northern Trust Capital Markets.

Being more specific in his critique of Tencent's performance, Leo Sun, a technology specialist at The Motley Fool, said: "The big surprise was definitely the online gaming business."

Speaking with CNBC's "Squawk Box," Sun said the 6 percent year-over-year growth from the segment was "pretty disappointing" as it usually reports numbers in the double digits. Furthermore, he added, most of the growth came from older games such as "Honor of Kings."

To exacerbate matters, Sun pointed to the company's reported 19 percent sequential fall in smartphone gaming revenue, saying it is a result of Tencent's inability to obtain regulatory approval for the sale of in-game items in the mobile version of the popular battle royale game "PlayerUnknown's Battlegrounds."

According to the Wall Street Journal, the roadblock toward approval is largely due to "PlayerUnknown's Battlegrounds" being a product developed by a company out of South Korea, a country that has had strained ties with China.

"PC games were also a problem," Sun said, pointing to an 8 percent sequential fall in revenues as personal computer gamers made the transition toward mobile devices.

Regulatory woes likely to be 'short-term'

The further fall in Tencent's stock comes days after it removed the game "Monster Hunter: World" from its WeGame distribution platform following multiple complaints by Chinese regulatory authorities. That move has led some to question the possibility of more regulatory woes ahead for the tech giant.

The removal of "Monster Hunter: World" a week into the title's China launch "really hurt," Sun said, adding, however, that it is unlikely to be permanent due to the importance of video games in Chinese tech.

Such issues with regulators are not new for Tencent, he told CNBC, saying the company has made tweaks to games such as "Honor of Kings" and Activision Blizzard's "World of Warcraft" in the past to satisfy the demands of regulators.

Echoing that sentiment, Morton said the Chinese regulatory environment "has always been stretched."

Additionally, Morton said, changes at the top of the Chinese regulator and the global rise in popularity of what he terms "tactical tournament games" have likely led the authorities to be "slightly more cautious than they otherwise would be."

"Eventually, the games will probably be approved again, but for now, there'll probably be a bit of short-term pain," Sun said.