Tencent is ramping up overseas investment in gaming assets, seeking to diversify away from China even as Beijing lifts punishing restrictions on the industry.
China's largest listed company by market capitalisation is aiming to invest in or purchase gaming studios after slowing the pace of new investments towards the end of 2022, according to four people familiar with the matter. European gaming studios are the primary target, they said.
"Martin has been banging the table on the M&A front again," said one person close to Tencent, referring to the group's president Martin Lau, who is in charge of its overseas expansion.
While Tencent has been building up its portfolio of overseas gaming studios for several years, the majority of its investments had still been in China before the crackdown on gaming.
"Prior to 2020, Tencent's gaming investments used to be heavily slanted towards Chinese companies. Now it's getting to the point where the majority of investments are overseas," said Daniel Ahmad, gaming analyst at Niko Partners.
Company insiders fear this trend could provoke regulatory scrutiny, with government officials pressuring companies to focus on bolstering the domestic economy. "It's only a matter of time before regulators begin reviewing and scrutinising overseas investment portfolios," said one Tencent manager.
Tencent faces a new deep-pocketed competitor in snapping up gaming assets. Through its Public Investment Fund, the Saudi Arabian government is investing $38bn to develop and acquire hit games as part of a broader push to become less dependent on oil sales.
Analysts said Tencent's industry expertise made it an attractive investor partner. "Tencent has a far greater ability to work with and help studios it acquires, but the emergence of new bidders could make deals more expensive for Tencent," said Bernstein's Zhu.
The Saudi Arabian fund's entry will not deter the Chinese internet giant, as its domestic empire is being forced to downsize under regulatory pressure.
With Chinese regulators wary of Tencent's large domestic market share, it has no alternative but to go overseas, said one person close to the company's management team.