Chart: Tencent Hit by First Quarterly Profit Drop Since 2005

Logo of Tencent is displayed at a news conference in Hong Kong China

Logo of Tencent is displayed at a news conference in Hong Kong China

Net profit fell 2 percent to CNY18 billion (USD2.61 billion) in the second quarter, from a year earlier, Tencent said in an earnings report released yesterday. As such, many popular western games are blocked from release in China due to content the ministry finds objectionable, like violence or anti-Chinese attitudes. A regulatory freeze and this week's removal of hit game Monster Hunter: World is hampering that effort, spooking investors long accustomed to Tencent's favoured position as one of China's leading corporate lights.

Although China is notoriously stringent with media censorship, this game licensing freeze is taking the vetting process one step further.

Under pressure to curb gaming marathons on Tencent's smash hit King of Glory (known as Arena of Valor in other territories) mobile multiplayer battle game, the company past year started restricting daily playing times for children.

While mobile games such as King of Glory and PlayerUnknown's Battlegrounds, or PUBG, have generated considerable traffic for Tencent, King of Glory has started a downtrend after more than two years of growth.

"A lot of games have not been approved", said Lau, adding that the government was aware "the restructuring is now affecting the industry as a whole".

Revenue from PC games dropped 5 percent year-on-year and 8 percent quarter-on-quarter.

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Video games in China have also been criticized for communicating non-socialist ideals (conflicting with the president's repeated mantra of "socialism with Chinese characteristics"), so the future of video games in China remains uncertain. "I think the monetisation will happen, it is just a matter of time".

The Chinese government has been halting its approvals of new online game licences as Chinese President Xi Jinping pushes a "purification" campaign in media and entertainment, according to reports.

Tencent said customers who purchased Monster Hunter: World were entitled to a full refund until August 20. This is where the authorities have been forced to hold on to the issuing of the gaming licenses in the country.

"The regulatory headwind is definitely having a toll" on Tencent's gaming revenue, said John Choi, an analyst at Daiwa Capital Markets, noting that the company has not been able to monetize a key title such as PUBG. Tencent has lost around $170bn in market value since January of this year.

Tencent still hasn't received full approval to introduce desktop versions for PUBG and "Fortnite".

Analysts had widely expected "Monster Hunter: World" to be one of 2018's biggest hits for Tencent, which licensed the game from Japan's Capcom Co Ltd 9697.T to sell on its WeGame platform. Lau said this showed the regulators' goodwill.

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