Chinese internet company Tencent Holdings Ltd. is likely to see a minimal impact on its revenues from President Donald Trump's ban on its messaging service WeChat, analysts said.
The scope of Trump's Aug. 6 order prohibiting "any transaction" with WeChat is unclear, the analysts said. The restrictions appear to apply to the international version of the app and not its domestic equivalent Weixin.
In terms of customer numbers, the U.S. accounts for less than 3% of WeChat and Weixin's combined 1.21 billion users, analysts said. If the app alone is banned in the U.S., the impact on Tencent could therefore be limited, they added.
Tencent CFO John Lo said Aug. 12 the order will impact its U.S. business only. U.S. revenues make up less than 2% of Tencent's total, Chief Strategy Officer James Mitchell said.
A broader interpretation of "transaction" which includes Tencent's hardware and software partnerships with U.S. companies would have a material impact, analysts said.
Tencent would not be able to buy U.S. software, chips and servers to build its cloud infrastructure, and the company may not be able to upload or update its apps on Apple's App Store, Chelsey Tam, senior equity analyst on Tencent at Morningstar, said in a research note.
Such an interpretation may be possible as Trump's order invoked the International Emergency Economic Powers Act which gives the U.S. government greater discretion over restrictions.
Tencent's investment in U.S. game companies may also be at threat from such an interpretation, Shawn Yang, deputy head of research at Blue Lotus, said. Tencent owns 100% of League of Legends maker Riot Games, and has a 40% stake in Fortnite maker Epic Games Inc. and a 5% stake in Call of Duty maker Activision Blizzard Inc.
The Chinese company should still be able to collaborate with overseas game studios, and its domestic gaming business is unlikely to be impacted, Tam Tsz Wang, a Tencent equity research analyst at DBS Vickers Securities, said. "We think taking the U.S. government to court is also an option for Tencent and could overturn or delay the implementation of the orders," Tam wrote.
There may be other workarounds, the analysts said. WeChat users in the U.S. can switch to Tencent's messaging app QQ, Morningstar's Tam wrote. The monthly active users of QQ was 647.6 million during the June quarter.
If Tencent is forced to exit the U.S. gaming market, its revenues for the segment could fall up to 10%, DBS' Tam said.
Tencent's global gaming revenues made up 23% of its total online gaming sales in the last three months of 2019, according to the company's annual report. Revenue from online gaming contributed more than 30% of Tencent's total in the second quarter of 2020.
Some 10% of global gaming sales were linked to U.S. consumers, according to DBS' Tam, who said around 1% to 2% of total online gaming revenues will be affected in this scenario. If the ban also restricts the business of Tencent's major game studio subsidiaries Supercell Oy and Riot Games Inc., around 7% of total online gaming revenues will be hit, or around 3% of total sales, he said.
The executive order is not expected to target Tencent's gaming businesses as they are not yet seen as a threat to U.S. users or competitors, analysts said. Perhaps of some relief to Tencent, Morningstar's Tam noted some executive orders do not result in "explicit action," citing one aimed at securing the information and communications technology and services supply chain, signed by Trump on May 15, 2019.