Tencent’s Trillion-Dollar Valuation May Have to Wait

Just a few weeks ago, Chinese videogame and internet technology giant Tencent looked near to cracking a $1 trillion valuation. Shifting winds out of Beijing could blow that out of reach for quite a while.

Shares have fallen 7.7% in the past two trading days following a Bloomberg report Friday that the company will likely be the next big target for regulators as Beijing takes on the country’s internet titans. Chinese regulators shocked investors by putting a brake on fintech company Ant Group’s record initial public offering at the last minute in November. Ant, backed by Alibaba, will now be regulated more like a bank. Tencent declined to comment on fintech regulatory matters.

It isn’t surprising that Tencent, which together with Ant dominates digital payments in China, could now be subject to tighter oversight too. China’s central bank released draft rules in January regulating the sector. But compared with Ant, Tencent has been less aggressive in online financial services such as lending or insurance. Tighter financial regulation would therefore be less devastating for Tencent than for Ant, since the former’s earnings still come mostly from games.

But tougher scrutiny will still hurt: The online-finance business has been growing fast. Morgan Stanley, for example, valued its fintech business at $157 billion in its report last week expecting Tencent to hit a $1 trillion valuation. Slower growth and higher capital requirements would mean investors must trim those lofty expectations. The two-day plunge in Tencent’s shares has already wiped out $65 billion from the company’s market value.

The bigger concern for Tencent is whether the regulatory crackdown will go beyond fintech. China’s antitrust watchdog fined Tencent on Friday for failing to seek prior approval for its 2018 investment in an online-education app. Other tech companies such as Baidu, Bytedance and Didi Chuxing were also fined. The fine was only the equivalent of $77,000—chump change for Tencent—but it could be an ominous sign for future mergers and acquisitions.

Tencent has been very successful in using deals to diversify beyond its core business. More stringent antitrust enforcement may also affect how Tencent uses WeChat, TCEHY 0.16% China’s largest social network with 1.2 billion users, to push some of its newest growth areas such as e-commerce and short videos.

The immediate blow to Tencent seems manageable, but even under the best-case scenario, regulatory uncertainty will weigh on shares for some time.

Write to Jacky Wong at JACKY.WONG@wsj.com

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