(Yicai Global) March 24 -- Tencent Holdings’ shares dropped after the Chinese social media and gaming giant’s quarterly revenue rose at the slowest pace since it went public, gaining just 8 percent in the final quarter of last year.

Tencent’s stock price [HKG: 0700] closed 5.9 percent lower at HKD366 (USD46.77) today. The benchmark Hang Seng Index fell almost 1 percent.

Revenue was CNY144.2 billion (USD22.6 billion) in the three months ended Dec. 31, the Shenzhen-based company said in its latest earnings report released yesterday. That was the slowest revenue growth since Tencent’s initial public offering in 2004.

“2021 was a challenging year, in which we embraced changes and implemented certain measures that reinforced the company’s long-term sustainability, but had the effect of slowing down our revenue growth,” founder, Chairman, and Chief Executive Officer Pony Ma said.

Tencent has faced headwinds from a tightening regulatory environment in China. The National Press and Publication Administration brought in new rules last August amid concerns over increasing game addiction among underage children. Game developers described the new rules as “the toughest ever.”

Quarterly Profit

Tencent, which earns much of its revenue from gaming, said profit fell 25 percent to CNY24.9 billion (USD3.9 billion) in the fourth quarter of 2021, based on a non-International Financial Reporting Standards basis, which reflects core earnings by excluding certain one-time and/or non-cash items.

“Despite financial headwinds, we continued to make strategic headway,” Ma said. That included “driving widespread adoption of our enterprise software and productivity tools, increasing content creation and consumption in our video accounts, and expanding our international game business.”

Income from value-added services such as online gaming rose 7 percent to CNY71.9 billion in the quarter from a year earlier, with revenue from domestic gaming up just 1 percent to CNY29.6 billion. Revenue from financial technology and corporate services soared 25 percent to CNY48 billion, while that from online advertising sales fell 13 percent to CNY21.5 billion.

Cost of revenues increased 15 percent to CNY86.4 billion because of an increase in costs for transactions, cloud service project deployment, server and bandwidth, and content.

2021 Earnings

For the full year, Tencent reported its slowest ever annual revenue growth, a gain of 16 percent to CNY560.1 billion (USD87.9 billion). Non-IFRS profit ticked up 1 percent to CNY123.8 billion, the slowest expansion rate in 10 years. On an IFRS basis, profit jumped 41 percent to CNY224.8 billion.

Combined monthly active users of WeChat and Weixin, WeChat’s sister app in China, rose 3.5 percent to nearly 1.3 billion as of Dec. 31. Instant messaging platform QQ’s MAUs dropped 7.2 percent to 552 million.

‘New Industry Paradigm’

The internet sector’s growth became frothy and unhealthy because for several years participants had over-emphasized zero-sum competition, aggressive marketing, reckless expansion, short-term growth and corporate benefits, overlooking the most important elements of sustainable growth, Tencent President Martin Lau said on the firm’s earnings conference call.

Since early last year, new regulations have been introduced to correct this behavior to promote fair competition, user protection, and data security, he added.

“We are already well-positioned for the new industry paradigm where the long-term oriented corporate culture that focuses us on user value, social responsibility, technology innovations and compliance, the key elements for sustainable and healthy growth,” Lau noted.

Over the course last year, Tencent’s financial performance was under pressure amid structural industry challenges, he added.

“So, I would say that these two years are years in transition for different reasons and once we have actually gone through the optimization across the board on marketing costs, staff cost, and operating costs, then we probably see a more stable type of margin structure starting from 2023,” Lau said.

Editor: Futura Costaglione