Earnings

Tencent share price: 5 things we learnt from Q2 earnings results

Tencent's [0700] share price had dropped 2.8% by Thursday’s close after posting an oddly downbeat Q2 earnings update. That was enough to wipe $11.7 billion off the Chinese tech giant’s value in a single day. Tencent’s share price had continued to fall as concerns over macroeconomic conditions and competition grow. However, shares have opened the week higher, closing Monday in Hong Kong up 2.9% on Friday’s close. 

 

 

1. Economic slowdown hurts revenues

For Q2, Tencent pulled in 88.82 billion yuan worth of revenue. While up 21.8% since the same time last year, this was off analyst expectations. Earnings, however, beat expectations to come in at 24.14 billion yuan, up 35% year-on-year. Tencent pinned the revenue miss on China's slowing economic growth, saying it plans to develop new revenue streams over the rest of the year.

 

2. Smartphone gaming delivers growth

Tencent's mobile gaming business bounced back after a regulatory freeze on new game approvals came to an end during the quarter. Put in place by Chinese authorities, the freeze had delayed new game approvals for 9 months. With that ended, the company managed to release 10 games in Q2. 

This saw revenue from smartphone games up 26% in Q2, to come in at 22.2 billion yuan. New title Peacekeeper Elite was a highlight. Since launch in May, it has delivered a high score of 50 million daily online users - all of whom can be marketed to with in-game monetisation options.

China is the fastest-growing video game market in the world and the company dominates the sector in the region. Overall, the gaming division delivered 27.3 billion yuan, up 8% year-on-year. 

¥27.3billion

China's gaming division revenue in Q2 - an 8% year-on-year increase

3. Business technology now a growth driver

While gaming accounted for 30% of total revenue, other areas also delivered. This included the financial technology and business services division, which saw a bumper haul. Revenues here came in at 22.9 billion yuan, up 37% compared to the same quarter last year. Leading the way were revenues from WeChat Play, Tencent's wealth management services and cloud computing. 

Focusing on WeChat, the messaging app saw a  7% gain in monthly active users to come in at 1.13 billion. With WeChat now being released internationally, including BNP Paribas launching WeChat Pay in Europe, this area could continue to grow in importance.

 

4. Advertising slows down

Advertising revenue growth dropped from 39% in Q2 2018 to 16% this quarter. Tencent pinned the blame on wider economic issues, which will go beyond the quarter. James Mitchell, Tencent's chief strategy officer, explained on the earnings call:

“Our assumption is that the macro environment will remain difficult for the rest of the year and that the situation of the heavy supply of advertising inventory will continue for the rest of the year and potentially into next year.”

Tencent is also facing competition from rival ByteDance for advertiser money, which chipped away at sales this quarter. Still online advertising continues to grow with revenue up 16% annually to 16.4 billion yuan, which accounted for 18% of its top-line numbers. Yet, this was well off the 25% growth seen in Q1.

“Our assumption is that the macro environment will remain difficult for the rest of the year and that the situation of the heavy supply of advertising inventory will continue for the rest of the year and potentially into next year” - Tencent's chief strategy officer, James Mitchell

 

5. Tencent will take a more measured approach

With uncertainty in the economy, capital expenditure dropped 38% compared to the same quarter last year. Cash put aside for investing also dropped as the company looked to shield itself from the headwinds faced by the Chinese economy. Another explanation offered by Mitchell was that the first half of 2018 offered an "unusually rapid pace" of investment, so an expectation that these numbers would match up, was unrealistic. In either case, Tencent said that it’s now taking a more "measured" approach to how it uses capital for the rest of 2019.

 

Market cap HK$3.218tn
PE ratio (TTM) 35.48
EPS (TTM) 9.491
Quarterly Revenue Growth (YoY) 20.60%

Tencent share price vitals, Yahoo Finance, 19 August 2019

 

Time to buy?

After the disappointing earnings release, CLSA's Elinor Leung argues that Tencent will look to mitigate things in the second half of the year even if growth remains slow. To do this Leung told Bloomberg that Tencent will look to increase ad inventory on its WeChat app, which is a high margin revenue stream. 

On the video game front, Bernstein analyst David Dai thinks that gaming revenue will re-accelerate now that government restrictions have been lifted. Dai also suggests that Tencent is the only company capable of operating a cloud gaming platform, which could be a huge money-maker if it comes to fruition. 

Both Bernstein and Leung’s analyses suggest there is plenty of growth left in the stock for investors who can look past this quarter’s disappointing revenue numbers.

Among other analysts, the vast majority either rate the stock a ‘buy’ or ‘strong buy’. The stock carries an average price target of 388 yuan. Hitting this would represent a 15% upside on the current share price.

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