The Chinese investment bank, China Renaissance, found that President Trump's executive order to ban U.S. residents from doing any business with Chinese messenger WeChat in about 45 days would have little impact on Tencent Holding's revenue.
"Tencent's non-China revenue (2019) accounted for less than 5% of total revenue (Ex. 1). Tencent disclosed that 23% of total online game revenue came from non-China markets in 4Q19, and we estimate U.S. revenue accounted for 20-30% of total non-China game revenue. As such, we estimate Tencent's current revenue exposure to the U.S. is less than 3%, with earnings exposure less than 5%."
Tencent, the owner of WeChat, saw shares plunged 5% in Hong Kong trading on Friday after President Trump issued the executive order to ban not just WeChat but also TikTok, a video app popular with Americans.
While the details for the ban are unclear, China Renaissance offers their thoughts on this developing story, concentrating on potential financial impacts:
What's the scope of the ban?
- The executive order prohibits "any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd, or any subsidiaries of that entity, as identified by the Secretary of Commerce".
- The executive order notes that after 45 days, the U.S. Secretary of Commerce shall "identify the transactions that will be subjected to the ban".
What's unclear at the moment?
- It is unclear whether the ban focuses solely on "WeChat the product" or "Tencent the corporation, along with its subsidiaries". The wording of the executive order seems to allow interpretation in both scenarios, which would have drastically different financial consequences, in our view.
- If focused solely on WeChat, it would presumably result in the WeChat app stopping operation for users in the U.S. However, if applicable to "Tencent the corporation", there could be notable disruption to Tencent's online game operation and its investment portfolio in U.S. companies, in our view.
- According to L.A. Times (link), citing a U.S. government official, the ban mainly targets transactions related to the WeChat app but not transactions with Tencent.
- It is still unclear whether the ban will lead to WeChat being removed from China's iOS app store, considering Apple (AAPL US, BUY, T.P.: US$478.40, Jason Sun) is under U.S. jurisdiction (over 200mn MAU of WeChat on iOS system in China, per QuestMobile).
- Also, it's unclear whether the ban will block U.S. companies from using WeChat business functions, including payment and mini programs, to reach consumers in China.
Tencent is the largest video game publisher in the world by revenue. And if the proposed ban of WeChat by Washington is really an attack to crush the publisher, then it's kind of pointless considering exposure in U.S. markets is fairly limited:
"We believe WeChat itself has immaterial business and financial exposure to the U.S.," China Renaissance said.
However, the story gets more complex, Tencent "has manageable revenue and investment exposure in the U.S." Some of those investments include:
"For instance, Riot Game and Supercell, two leading global game developers, are majority-owned by Tencent. It also has a minority holding in Activision Blizzard (ATVI US, Not Covered) and Tesla (TSLA US, NC), among others," the Chinese bank said.
If the Trump administration goes ahead with the banning of WeChat and TikTok next month, well, it would certainly confirm a technology war between both countries is underway. That would result in a retaliatory response by China...