Tencent Holdings on Thursday said it would restrict its focus to its core business, while maintinaing cost-cutting and improving efficiencies, as it reported its first drop in annual revenue to date.

The world’s largest video game company and operator of the WeChat messaging platform posted revenue of 554.55 billion yuan ($81 billion) for 2022, down 1% from a year earlier, after China’s economic slowdown due to the pandemic and a long-running regulatory crackdown dented profits.

Analysts on average had expected 555.15 billion yuan, according to Refinitiv.

Profit attributable to equity holders fell 16% to 188.24 billion yuan for the year versus a consensus estimate of 114.19 billion yuan.

Tencent Chair and CEO Pony Ma told reporters on a call the company would focus this year on getting more out of existing core businesses, rather than on “trying to do everything” and on operating in “red ocean markets”, where competition is intense.

“We hope that our entire business management team and technology will be more focused,” he said. “I think this is very important because we can see that focus and making breakthroughs are very key to overall development.”

The business outlook is uncertain in the world’s largest gaming market after two years of regulatory crackdowns, but sector participants are hopeful of a recovery as regulators have resumed granting publishing licences since late last year after a months-long freeze. Unlike in most other countries, video games need approval from regulators before release in China.

The crackdown has changed the operating environment for China’s tech giants as regulators have tightened scrutiny over monopolistic behaviour and companies’ handling of user information.

Martin Lau, president of the company, told a later call with analysts that regulations are being normalised and support for platform companies should improve this year.

“[Chinese president Xi Jinping recently] mentioned supporting platform companies to show competence, creating employment, driving consumption and international competition,” he said, “The premier also highlighted the private sector would have a significant potential in the China economy.”

ADVERTISING BUSINESS PICKS UP

Helping to offset the losses in domestic gaming and fintech, Tencent’s online advertising business showed a surprisingly strong recovery in the fourth quarter, with revenue for the segment rising 15%, and contributing to a 1% rise in the group’s revenue overall for the quarter ended December.

China’s city lockdowns intensified in the weeks to early December when the country abruptly ended its zero-COVID policy, unleashing a wave of infections, which heavily disrupted the economy and caused many deaths.

Charlie Chai, an analyst with 86Research, said Tencent’s performance as a whole was “lukewarm”, but the advertising segment “shrugged off the COVID challenge and delivered industry-beating growth”.

During the media call, Lau also spoke about the company’s forays into generative artificial intelligence, which has seen a surge in global interest, driven by the popularity of Microsoft-backed startup OpenAI’s chatbot ChatGPT.

Reuters reported last month that Tencent was working on a ChatGPT-like chatbot named the “HunyuanAide” that will incorporate Tencent’s Hunyuan AI model.

Lau said the company was rapidly advancing its proprietary foundation model Hunyuan and planned to gradually roll out its own AI foundation models.

Tencent’s chief strategy officer James Mitchell said that Tencent was ready to bear the large cost associated with training AI models even though it is focused on cost-cutting in other areas.

The United States in October announced export controls on high-end computer chips to China to try to contain AI development in the country, but Mitchell said Tencent has enough chips ready to develop its AI models.

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