Tech Giant Tencent Caught in Chinese Regulatory Trap – Wall Street Journal | Gaming News

The disappointing quarterly report—and Tencent's acknowledgment that it is at the mercy of Chinese regulators—is the latest in a series of setbacks for the Shenzhen-based company, whose share price has tumbled more than 17% this year.

Tencent, which was founded in 1998, became an Asian market darling after going public in 2004, hitting a market-capitalization high of $576.63 billion in January. Its core business is videogames but the company also runs China's dominant social network, WeChat, with more than a billion users.

Tencent said its second-quarter profit fell 2% from a year earlier, the first such decline since 2005. Its Hong Kong-listed shares dropped 3.6% on Wednesday.

Among China's other tech giants, shares of

Baidu
Inc.

BIDU 2.47%

fell Wednesday and are down about 10% this year. Shares of e-commerce giant

Alibaba Group Holding
Ltd.

BABA 0.46%

have fallen about 3% for the year.

Tencent President

Martin Lau

said in a call with analysts that the company hasn't been able to make money off two mobile versions of the popular PC game “PlayerUnknown's Battlegrounds,” or PUBG. He blamed it on delays in game approvals by regulators because of a restructuring involving two Chinese agencies that oversee videogame content.

“Because of restructuring, it's now affecting the industry as a whole,” Mr. Lau said. “From a revenue-growth perspective, the gaming sector is one key area of weakness. As we have said, the big part of it is our biggest game is not monetizable.”

Analysts said the regulatory snag suggests more trouble ahead for the games industry.

“These companies place their bets on new games that now they cannot monetize,” said

Tom Wijman,

a senior market analyst at Newzoo. “That is a huge concern for the second half of the year.”

ADRs of

NetEase

Inc., Tencent's biggest Chinese gaming rival, fell 3.6% on Wednesday. The Beijing-based company, which operates popular games such as “World of Warcraft” and “Overwatch” for the China market, also faces regulatory risks, analysts said.

Chinese authorities have become more assertive, blocking news and entertainment content they consider vulgar, overly violent or not in keeping with Communist Party values.

Last year, state-run People's Daily went after Tencent, saying its “Honor of Kings” mobile game was so addictive that school children were skipping their homework to play it late into the night. Tencent responded by putting time limits for players under 18.

The problems with authorities have continued. This week, Tencent was forced to stop sales of “Monster Hunter: World” just days after its debut because Chinese regulators pulled the operating license. Some analysts attributed it to the game's dark content.

“Monster Hunter” had attracted more than a million preorders and was expected to boost Tencent's stagnant PC-based games business, whose revenue fell 8% in the second quarter compared with the first quarter.

On the earnings call, Mr. Lau said the removal of “Monster Hunter” was “really a one-off event.”

“The content eventually delivered by the developer was actually not completely compliant with the regulatory requirement,” he said.

“As a result, we have to suspend the sales and we need to adjust the content alongside the developer in order to prepare it for approval in the future.”

To monetize games, companies need approval for new titles from two regulatory bodies, the National Radio and Television Administration and the Ministry of Culture and Tourism.

The National Radio and Television Administration hasn't approved any new games since March, part of a restructuring of the regulatory agencies that oversee the industry, analysts said.

Neither agency responded to requests for comment Wednesday.

Regulators are “still in a power transition period which makes it a little bit unclear who should be responsible for game approval at this stage,” said Shawn Yang, executive director of Blue Lotus Capital Advisors. “Everything has stopped for about five months.”

For the second quarter, Tencent reported a profit of 17.9 billion yuan ($2.7 billion), with revenue rising 30% to 73.7 billion yuan. Analysts polled by S&P Global Market Intelligence had projected a profit of 18.7 billion yuan and revenue of 77.8 billion yuan.

“It's a very big miss,” said

Douglas Morton,

head of research for Asia at Northern Trust Capital Markets. “The regulatory pressure on the approvals for new games…that's been a huge disappointment.”

Games are Tencent's single-biggest source of revenue. Compared with the first quarter, mobile-gaming revenue fell 19% to 17.6 billion yuan.

Mr. Lau said Tencent hopes to turn things around with new games it plans to roll out in the months ahead. The company is working to get approval to monetize the PC game “Fortnite,” which is expected to be a popular title in China.

“At this point we don't know when the approval will start,” he said. “We do believe it's not a matter of whether these games will be approved for monetization, it's a matter of when.”

—Yang Jie and Fanfan Wang in Beijing and Steven Russolillo in Hong Kong contributed to this article.

Write to Shan Li at shan.li@wsj.com