Tencent Holdings Limited (TCEHY)

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China's Antitrust Regulators Slam Alibaba and Tencent -- What Should Shareholders Do?
By: Motley Fool | December 16, 2020

• The two tech giants were just fined for unapproved and unreported acquisitions.

Last month, China's State Administration for Market Regulation (SAMR) drafted new antitrust rules aimed at the country's largest tech companies. It didn't call out any companies at the time, but it declared it would weed out "monopolistic practices" like price discrimination, the use of exclusive agreements to lock in merchants, and the compulsory collection of user data.

At the time, many analysts speculated the new rules would affect Alibaba (NYSE:BABA) and Tencent (OTC:TCEHY) the most. Those predictions recently came true, as regulators fined both tech giants and the logistics company SF Holding.

Let's see if Alibaba and Tencent's investors should be concerned.

What happened to Tencent?
Tencent's e-books subsidiary, China Literature, was slapped with another 500,000 yuan fine for failing to report its purchase of New Classic Media, a producer of TV shows and movies, in 2018. Tencent owns 59% of the company, which went public in Hong Kong three years ago.

That tiny fine won't hurt Tencent, which is expected to generate $72.7 billion in revenue this year. But it could rein in the expansion of its WeChat messaging platform, which locks in over 1.2 billion monthly active users with millions of integrated Mini Programs for payments, online orders, games, and other services.

Tencent aggressively tethers first-party and third-party apps, including China Literature, to that data-sharing ecosystem. Therefore, the move against China Literature could prevent other subsidiaries and affiliates, including Tencent Music and WeChat Pay, from expanding further via acquisitions.

Chinese regulators are also reportedly probing Tencent's planned merger of Huya (NYSE:HUYA) and DouYu (NASDAQ:DOYU), the country's two largest video game streaming platforms. The combined platform would serve over 300 million monthly active users, dominate the e-sports market, and complement Tencent's core gaming business and other streaming media platforms.

If that deal is blocked, Tencent's other ecosystem-building ideas -- including its rumored interest in buying a stake in Baidu's streaming platform iQiyi -- could quickly fizzle out. Those restrictions could make it tough for Tencent to leverage the strength of WeChat to enter new markets and affect all four of its main businesses -- video games, online advertising, social networking, and business and fintech services -- over the long term.

What should investors do?
Alibaba and Tencent already face concerns about new auditing standards and potential stock de-listings in the U.S., and the recent pressure from Chinese regulators is causing more headaches.

But neither headwind is as fierce as it seems: Chinese companies still have three years to comply with the new auditing rules in the U.S., while the recent fines and probes in China are merely warning shots against pursuing unapproved investments and acquisitions in the future.

Meanwhile, Alibaba and Tencent's core businesses remain strong. Alibaba's core commerce and cloud businesses are still generating double-digit sales growth, and Tencent's four businesses fired on all cylinders throughout the pandemic. Investors should keep an eye on these developments, but they shouldn't sell these high-growth stocks simply because regulators are flexing their muscles.

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