Tencent will distribute most of its 159.4 billion Hong Kong dollar (US$20.3 billion) stake in Meituan to shareholders as a dividend, the company said in a filing with the Hong Kong Stock Exchange.
Tencent, which owns a 17% stake in Meituan, said the divestment set to be completed by March would see each investor holding 10 shares of Tencent receive one share of the delivery app. Tencent will hold a less than 2% stake in Meituan after the distribution.
Tencent president Martin Lau has resigned as a non-executive director of the food delivery company, after serving on Meituan’s board since October 2017.
“When we look at the shareholder base, there is actually a very big overlap of the biggest institutional shareholders between us and Meituan, which means that there will be a lot of institutional investors who want to get the Meituan shares,” Lau, who also serves as executive director of Tencent, told analysts in a conference call.
“We have actually made a very big financial gain from the investment in Meituan already, and that’s why we would like to allow our shareholders to start making their own decisions about what to do with the shares,” he said.
Tencent, which has been a minor direct player in online retail, had chipped away at Alibaba’s overwhelming e-commerce market share in recent years by backing both JD.com and Pinduoduo. In December, Tencent similarly cut its stake in online retailer JD.com by distributing shares as dividends to shareholders.
James Mitchell, Tencent’s chief strategy officer, said the company considers three factors when determining whether it is appropriate to distribute an investment: the investee’s financial strength, industry positioning and Tencent’s investment return.
“Meituan is a clear leader in food delivery, and we’ve had very good returns on the investment of around 30% internal rate of return,” Mitchell said. “Meituan is also profitable, although it’s not as profitable on a headline basis as JD was when we distributed. But that’s because Meituan is investing in community group buying and other new services to expand its addressable market for the longer term.”
On the sales front, meanwhile, the company continues to struggle. Its third-quarter revenue fell 2% on the year, after a decline in the previous three months – Tencent’s first quarterly contraction since its 2004 listing.
Revenue came in at 140.09 billion yuan (US$19.8 billion), falling short of the 148.09 billion yuan average forecast in a Refinitv survey of 17 analysts. Profit attributable to equity holders of the company, however, rose 1% to 39.94 billion yuan, the Shenzhen-based company said, citing cost-efficiency initiatives.
Tencent’s sales have been slowing since last year amid China’s worsening economic growth outlook and regulatory uncertainties surrounding China’s tech companies.
Domestic gaming revenue decreased 7% on the year to 31.2 billion yuan, a decline of 1.9% from the previous quarter, due to government measures designed to limit minors’ screen time and slow regulatory approval of new titles from leading gaming companies like Tencent and rival NetEase.
Both Tencent and NetEase received one approval each in September to launch new paid games for the first time since Chinese regulators froze all licensing in July last year.
Analysts, however, are sceptical the approval will meaningfully boost income for Tencent, saying the game was “too small” to be a hit with players. China did not approve any new titles in October and November, apparently due to the sensitive timing of China’s top leadership meeting last month.
International gaming revenue rose 3% in the quarter to 11.7 billion yuan from a year ago, as the company accelerated a global expansion amid fears over license delays in its domestic market.
Mitchell said the company has changed its game development strategy, “although the full effects of the change can take a few quarters to show through”.
Tencent is concentrating resources on a smaller number of new games, but these are more substantial, have greater production values and potential for a global reach. The company also is spending more time and resources upgrading and energising existing games, Mitchell told analysts in the conference call.
“We actually do believe there will be a further issuance of new game licenses in the near future, and so to some extent, the headwinds in the game industry will mitigate as more new games are released,” he said.
Revenue from online advertising fell 5% to 21.5 billion yuan, a smaller contraction than the previous quarter, driven by the improvement of Tencent’s games and e-commerce segments. But media advertising revenue slid 26% to 2.6 billion yuan, primarily due to fewer releases of popular drama series on Tencent Video.
Fintech revenue, which includes WeChat Pay, grew 4% to 44.8 billion yuan, higher than the previous quarter, due to the recovery of online and offline commercial payment activity.
An executive from Tencent told Nikkei Asia that the company has continued to lay off workers across departments since the beginning of the year to scale down noncore businesses and cut costs. As of Sept. 30, Tencent had 108,836 employees, compared with 112,771 at the end of December last year.