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Valorant
Courtesy Photograph
Executive orders targeting Chinese social media apps put a spotlight on
Tencent Holdings,
and its wide-ranging investments in U.S. game publishers.
President Donald Trump signed two executive orders Thursday aimed at Chinese-owned social-media apps TikTok and
WeChat.
Trump wrote in the second order that data collected by Tencent’s WeChat “threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information,” adding that the U.S. “must take aggressive action against the owner of WeChat to protect our national security.”
The Los Angeles Times, citing a White House official, reported the order blocks transactions related to WeChat, rather than Tencent. But such concerns left many to question if the White House would take issue with Tencent’s games, especially mobile ones.
Tencent owns Riot Games, which makes the hugely popular League of Legends, as well as the up-and-coming tactical-shooter Valorant. A Tencent spokesperson said the company is “reviewing the executive order to get a full understanding.” A Riot Games representative did not reply to a request seeking comment.
The sanctions will apply to transactions only as defined by the secretary of the Commerce Department. Gavekal Research’s Dan Wang wrote in a note Friday that a narrow interpretation of the order would simply block access to TikTok and WeChat in the U.S., while a more broad one could potentially prevent any U.S. firm from supplying technologies to Tencent or ByteDance.
“Whether Commerce employs a narrow or broad interpretation of the orders will be clarified by mid-September when Secretary of Commerce Wilbur Ross makes the determination of which transactions he will block,” Wang wrote. “Limiting the implementation to restricting WeChat alone might not be a big blow to Tencent, although it would disrupt communications for both US firms and individuals with Chinese connections and the millions of Chinese people in the US with family and friends back home.”
A Commerce Department representative didn’t respond to a request for clarification. Wang noted the planned sanctions could also be part of the White House’s wider negotiations with China, meaning an order could be watered down before taking effect.
“But if the US is serious about national security concerns, Commerce would therefore be inclined toward a more severe reading,” Wang wrote. “This would create significant risk that Tencent’s operations are disrupted after September. Secretary Ross himself has proven to be hawkish on China, and Trump has indicated on several occasions that he wants to appear tougher on China in the lead-up to the elections.”
Tencent’s shares were down 5% in Hong Kong trading Friday, while its U.S. depositary shares were down 7.7%.
To be sure, such an order will likely be challenged in court. But a sale of TikTok’s U.S. operations has drawn bipartisan support, notably from Senate Minority Leader Chuck Schumer.
Tencent also has a controlling stake in Supercell, which makes Clash of Clans, and a 40% stake in Epic Games. Epic publishes Fortnite, and licenses the Unreal Engine, a platform that’s widely used to make videogames, as well for visuals on film and television sets. Beyond that, Tencent has stakes in publicly traded firms like
Activision Blizzard
(ATVI),
Ubisoft Entertainment
(UBSSF),
Snap
(SNAP),
Spotify Technology
(SPOT), Universal Music Group (UMG), and
Tesla
(TSLA), among others.
Companies also partner with Tencent on mobile games and releases in mainland China. Activision Blizzard recently got approval to launch a version of Call of Duty: Mobile in China. The game was made via a partnership with Tencent.
“While it’s too early to gauge the potential impact of the situation, the messaging from The White House seems to be that the Executive Order will not impact Tencent’s gaming properties,” Jefferies analyst Alex Giaimo told Barron’s. “It’s a fluid situation that we continue to monitor, but this is what we know as of now.”
Citi Research analyst Alicia Yap wrote in a note that her team is not in a position “to judge the future evolvement of this issue,” but said she believes WeChat is the main target, rather than Tencent overall. If that’s the case, she thinks the impact to Tencent’s financials would be limited. If the order winds up extending to other apps operated by Tencent, the biggest risk, according to Yap, would be to PUBG Mobile. But such a U.S. ban would affect Tencent’s smartphone games revenue by less than a percent.
“Nevertheless, the overhang and ongoing development of potential future impact, as it relates to subsidiaries or investment stakes owned by Tencent, remain unknown, and we believe the share price will likely be under some pressure near term,” she wrote.
Citing the company’s “solid and rich game pipeline,” the coming launch of Dungeon & Fighter Mobile and the approval of Call of Duty Mobile, growth opportunity in its fintech and cloud business, and the strength of its fundamental business, she sees any continued share-price weakness or overhang as “an enhanced buying opportunity.”
Write to Connor Smith at connor.smith@barrons.com
