Tencent will distribute a $20 billion stake in Meituan as a dividend

(Bloomberg) — Tencent Holdings Ltd . has pledged to distribute the majority of its shares in food delivery giant Meituan to investors as the Chinese social media leader steps up plans to reduce its vast holdings in the world’s biggest internet industry.

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Tencent, which has announced plans to reduce its stake in online retailer JD.com Inc., will distribute more than 958 million Class B shares in Meituan as a special dividend to existing shareholders. Tencent announced the move as it reported a second straight quarter of revenue declines, underscoring the extent to which China’s deteriorating economy is hurting its biggest private corporations.

The decision marks another milestone in Tencent’s evolution from a growing Internet empire with investments in much of China’s tech space to a more focused, cost-conscious gaming and social media operator. His exit from JD, and now much of Meituan, comes after Xi Jinping imposed a series of withering restrictions on the industry in 2021, including limits on playing time and content.

Tencent executives previously denied they intended to sell their stake in Meituan, China’s food delivery leader. The shares to be paid out, valued at about HK$155 billion ($19.9 billion), represent about 91 percent of Tencent’s Class B stake. Besides JD and Meituan, Tencent also owns part of Kuaishou Technology, Didi Global Inc. and Bilibili Inc. And this year it sold about $3 billion worth of shares in Southeast Asia’s largest Internet company, Sea Ltd.

“Tencent giving away shares to Meituan looks like a step towards regulatory compliance,” said Sean Yang, an analyst at Blue Lotus Capital Advisors who has a buy rating on Tencent. “They will no longer be in the same camp, but will be normal business partners in the future,” reducing Tencent’s influence on the online commerce industry.

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Read more: Tencent Gives Away $16B JD Shares in Crackdown-Led Shift

The move marks another setback for Tencent, which along with Alibaba Group Holding Ltd. held sway over much of China’s technology sector.

Beijing has punished the country’s tech giants for anti-competitive behavior, including maintaining closed ecosystems that benefit certain companies at the expense of others. Dividends from JD and Meituan could buy goodwill with the government, which has been pushing for such barriers to be lifted and for tech firms to share the wealth.

China’s internet industry has resigned itself to a new era of quiet growth, shifting its focus to boosting profitability from chasing market share after Beijing’s crackdown wiped more than $1 trillion from its total market value in 2021. As regulators eased their crackdown on the technology , the once free sector remains weighed down by weak consumer spending and tight Covid restrictions.

Tencent’s revenue fell 2 percent to 140.1 billion yuan ($19.8 billion) in the September quarter, compared with the average forecast of 141.4 billion yuan. Net income came in at 39.9 billion yuan, compared with expectations of 25.2 billion yuan. Shares in Prosus NV, Tencent’s largest shareholder, rose more than 2 percent in Europe, while Naspers Ltd rose as much as 5 percent.

Chinese tech stocks recovered some of their losses this month after the Communist Party began backing away from its Covid-Zero playbook and offered more incentives to the Biden administration to work together. Xi’s shift on these fronts, combined with perceptions of a renewed focus on revitalizing the world’s No. 2 economy, has fueled speculation that Beijing will begin to free up the private sector.

But Tencent remains vulnerable to macroeconomic headwinds. Tighter global marketing budgets and increasing competition from ByteDance Ltd., the owner of TikTok, are cutting into digital advertising profits. In cloud computing, revenue has fallen this year as the company works to cut loss-making contracts.

In its core video game operations, Tencent has yet to find its next big hit to fill the gap behind Honor of Kings, which was first released in 2015. Only one Tencent game has been approved for local release since Beijing censors renewed the distribution of licenses in April.

Tencent is co-developing a new mobile game with Capcom Co. for the Japanese studio’s popular Monster Hunter franchise, in an effort by the leading Chinese game developer to remake itself for the international market.

The company’s appetite for foreign gaming assets is increasing at a time when it is shedding other assets and spending more judiciously at home. In September, the Shenzhen-based team spent roughly $300 million to double its stake in Ubisoft Entertainment SA.

While investors have welcomed Tencent’s recent cost-cutting, some are pushing for faster top-line adjustments than long-term gaming bets. The focus is on the growth of WeChat’s short video feed, which has yet to fully monetize its content with e-commerce and advertising offerings.

–With help from Peter Elstrom, Vlad Savov, Jane Zhang, Sarah Zheng, Jennifer Ryan, and Ville Heiskanen.

(Prosus stock updates, analyst comment from paragraph five)

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