Internet giant may skip dividend while eyeing potential investigations

Chinese internet giant Tencent Holdings Ltd did not recommend an interim dividend payment even though its interim profit beat the market consensus forecast as the company needs to reserve financial resources as it braces for potential regulatory investigations of the industry.

The mainland-based technology giant said its profit attributable to equity holders for the six months ended June 30 rose 46 percent to 90.35 billion yuan ($13.94 billion) from the previous year. Revenue surged 23 percent to 273.56 billion yuan.

The company attributed the increase in interim profit to services enhancement and healthy growth rates across its business lines, particularly business services and advertising, and said its game revenue benefited from international growth.

"We are increasingly deploying our technologies and expertise to help small and medium-sized enterprises, public services and corporations collaborate internally and connect with their users externally, which we believe contributes to the real economy and to society at large," Tencent Chairman Pony Ma said in a company statement on Wednesday.

The company's combined monthly active users of WeChat rose 3.8 percent to 1.25 billion, while the MAU of QQ declined 8.8 percent to 590.9 million. Fee-based value-added service registered subscriptions rose 12.8 percent to 229.4 million.

Tencent is a leading provider of value-added services in personal computer and mobile online games, communication and social, digital content and mobile payment services on the Chinese mainland.

"The affirmation of Tencent's A1 rating reflects its strong financial profile, large customer base and a track record of monetizing value-added services offered on its online and mobile platforms, which have helped sustain free cash flow generation," said Lina Choi, a Moody's senior vice-president and its lead analyst for Tencent.

However, financial analysts said the company's prospects may be clouded by the potential regulatory probes laying ahead.

"The risk of a regulatory crackdown around data privacy and the use of consumer data in operations on China's large internet platforms, such as Tencent, Alibaba and Didi, looks set to remain, and could widen, discounts in sector valuations versus global peers,"Bloomberg Intelligence technology analysts Matthew Kanterman and Tiffany Tam wrote in a research note.

Moody's cautioned downward rating pressure could emerge if Tencent experiences a sustained erosion in its active user base that leads to lower cash flow, engages in aggressive acquisitions that strain its balance-sheet liquidity or raises its overall risk profile, adopts an aggressive dividend policy that weakens its balance-sheet liquidity or demonstrates a weaker credit profile.

Furthermore, the strengthened regulatory oversight in the Chinese mainland, which could affect the company's operations or business model, would also affect the rating, Moody's said.

But Moody's said Tencent also has a track record of working with regulators, resolving differences and making changes without negatively affecting its profile. The technology company's low debt leverage, strong cash position and prudent approach to investments and acquisitions could provide it with a buffer against regulatory uncertainties.

Daiwa Capital Markets said in its research note: "Regulatory crackdowns continue to weigh on near-term market sentiment toward the sector. However, July operating data for e-commerce and online games was broadly in line with no major surprises. We reiterate our positive stance on the sector. Our unchanged top picks are Tencent, NetEase, Baidu and Meituan."

Tencent's share price fell to a 52-week low of HK$419.2($53.74), before recovering slightly during the session to close on Thursday at HK $421.20, still the lowest finish for the stock on a year-to-date basis.