Tencent is ramping up overseas investment in gaming assets, seeking to diversify away from China even as Beijing lifts punishing restrictions on the industry.

China’s largest listed company by market capitalisation is aiming to invest in or purchase gaming studios after slowing the pace of new investments towards the end of 2022, according to four people familiar with the matter. European gaming studios are the primary target, they said.

The move comes despite an improving regulatory environment at home. Beijing opened the floodgates on approving new game titles in April last year after a nine-month blockage amid a broader crackdown on gaming that hampered the growth of Tencent and rival NetEase.

“Tencent has no problem with banhao now,” said one company insider, referring to the regulatory gaming approval process in China. The group has a profitable portfolio of smash-hit games in the mainland, including legacy titles such as Honor of Kings and Peacekeeper Elite. Tencent accounted for 44 per cent of online gaming revenue in China in the first half of 2022, according to Chinese data provider Chyxx.

However, the worry within Tencent is that Beijing will prevent its domestic business from becoming as dominant as it once was, while the company needs to move fast overseas at a time when rivals such as Saudi Arabia’s sovereign wealth fund are rapidly expanding into the global gaming industry.

Tencent’s domestic gaming business made up 73 per cent of its Rmb170bn ($24.5bn) gaming revenue in 2022, and the group is bringing several blockbuster titles online this year, including the projected rollout of its self-developed team-based shooting game Valorant.

The tech group will receive another boost if its Dungeon & Fighter Mobile game receives regulatory approval. The long-awaited game is widely expected to be one of the company’s biggest releases of the year.

Tencent executives told its gaming team in February that regulators had indicated the game would be given the green light to launch within months, according to people with knowledge of the discussions.

“DNF Mobile is a big franchise with a pre-existing fan base,” said Robin Zhu, China internet analyst at Bernstein.

The South Korean-made Dungeon & Fighter PC game has built a loyal following of players in China, but the release of the mobile version was delayed in 2020 amid an intensifying diplomatic dispute over Seoul’s anti-missile defence system.

Despite the tailwinds in its domestic business, there remains concern that Chinese regulators are sensitive to Tencent further solidifying its dominant position, leading executives to scour the world for gaming assets to diversify away from China.

“We weren’t aggressive in our capital deployment towards the end of last year given macroeconomic uncertainty in Europe and the political situation with the US,” said one Tencent insider.

Tencent does not make public the size of all its overseas investments and has previously asked venture capital partners to leave its name off press releases that start-ups publish to tout new funding rounds.

“Martin has been banging the table on the M&A front again,” said one person close to Tencent, referring to the group’s president Martin Lau, who is in charge of its overseas expansion.

While Tencent has been building up its portfolio of overseas gaming studios for several years, the majority of its investments had still been in China before the crackdown on gaming.

“Prior to 2020, Tencent’s gaming investments used to be heavily slanted towards Chinese companies. Now it’s getting to the point where the majority of investments are overseas,” said Daniel Ahmad, gaming analyst at Niko Partners.

Company insiders fear this trend could provoke regulatory scrutiny, with government officials pressuring companies to focus on bolstering the domestic economy. “It’s only a matter of time before regulators begin reviewing and scrutinising overseas investment portfolios,” said one Tencent manager.

Tencent did not respond to a request for comment.

Tencent’s hunt for overseas gaming studios is driven in part by concern with the internal pipeline of games in development. One senior manager in the gaming team said investment in new projects was badly affected by the group’s cost-cutting efforts last year, following Beijing’s crackdown on its largest internet groups.

While Tencent has a strong pipeline of games this year, the reduced investment has left it without a clear group of future “cash cow” blockbuster hits, a problem the company is addressing by investing in or acquiring smaller studios overseas.

Slowing sales of its major titles Honor of Kings and Peacekeeper Elite have accentuated concern about the group’s future revenue stream. According to Goldman Sachs research, both titles recorded a 10 per cent decline in sales in March compared with last year.

Several of Tencent’s overseas studio games have proven a smash hit in the mainland, including League of Legends, developed by LA-based developer Riot Games.

Tencent faces a new deep-pocketed competitor in snapping up gaming assets. Through its Public Investment Fund, the Saudi Arabian government is investing $38bn to develop and acquire hit games as part of a broader push to become less dependent on oil sales.

This month, PIF’s gaming fund Savvy Games acquired the US game developer Scopely for $4.9bn, its third major investment this year after purchasing esports platform Vindex and buying a stake in the esports agency VSPO.

Analysts said Tencent’s industry expertise made it an attractive investor partner. “Tencent has a far greater ability to work with and help studios it acquires, but the emergence of new bidders could make deals more expensive for Tencent,” said Bernstein’s Zhu.

The Saudi Arabian fund’s entry will not deter the Chinese internet group, as its domestic empire is being forced to downsize under regulatory pressure.

With Chinese regulators wary of Tencent’s large domestic market share, it has no alternative but to go overseas, said one person close to the company’s management team.

“You still have quarterly financial results where you need to show growth,” they said, “so you have to go to the west. With the US shutting its doors to Chinese companies, Europe is the only place to go.”

Articles You May Like

With I-70 expansion, Missouri makes overdue investment
The Costs Of Opening And Holding A Forex Trade
Is Germany the ‘sick man’ of Europe once again?
How the war in Ukraine is reviving Russia’s rustbelt
How Thiel and Silicon Valley funded the sudden rise of JD Vance