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Earnings Preview: Can Tencent shrug off its sluggish performance?

Tencent

In late 2021, Tencent exceeded its rival, Alibaba, and becomes the largest Chinese tech company based on market capitalization with a value of US$236 billion. The Chinese social platform giant will report its first-quarter earnings on Wednesday,18 May after the close of the Hong Kong stock market. Investors will be paying close attention to its three key business segments; gaming, fintech, and cloud computing solutions to gauge the company’s future growth prospects.

A slowdown in revenue growth

Tencent has recorded the slowest revenue growth of 8% in the final quarter of 2021 due to Beijing’s regulatory crackdowns on the Chinese tech firms. Its primary revenue contributor, the online gaming segment was hit by the government’s regulations for limiting the playing time for children aged under 18 years old. Tencent is expected to maintain stable revenue growth of 3% year-on-year in the gaming segment, a slowdown from 7% recorded in the fourth quarter of 2021. But on a positive note, a series of newly approved game titles have been released in the first quarter, together with the most popular domestic played game, “Honour of Kings”. The management of Tencent has expected the negative impact of the recent regulatory measures may likely be negated from the second half of 2022 onwards which could translate to better revenue guidance. At the same time, the revenue stream from Tencent’s international gaming segment may continue to gain momentum as the company shifts its focus toward the overseas market. The international gaming segment has recorded a rapid annual growth of 34% in the fourth quarter of 2021.

Fintech and cloud computing in focus

Fintech and cloud computing is the second largest revenue driver which accounts for 31% of its total revenue in 2021. Despite Alibaba’s dominance in the domestic Chinese cloud computing solutions market, Tencent’s cloud computing business is its closest rival that has managed to obtain a domestic market share of 20% and around 14% globally. The company has pledged to invest US$70 billion in cloud computing and AI in 2020, focusing on IaaS (Infrastructure as a Service) and PaaS (Platform as a Service) to develop the ecosystem, including the WeChat office, and WeChat meeting and WeChat pay. The Fintech and cloud segment is expected to grow 19% year-on-year in the first quarter, a slowdown from the 25% growth recorded in the last quarter.

Softening advertising income 

Beijing’s regulatory crackdowns on gaming and after-school education firms’ business practices have translated to a significant negative impact on Tencent’s online advertising revenue which fell 13% year on year in the fourth quarter. Its advertising revenue may continue to suffer from ongoing regulatory overhaul and the recent stringent Covid lockdowns imposed on major cities in China, an annual decrease of 15% is expected in the first quarter based on consensus estimates according to Sealand Securities.  

Interestingly, JPMorgan Chase has just upgraded its outlook on several Chinese tech stocks, including Alibaba, Tencent, Meituan, and NetEase on Monday, 16 May despite a sharp slowdown in the country’s economic growth due to the impact of strict Covid lockdowns in major cities like Shanghai. In addition, the government’s upcoming stimulus measures may provide some macro tailwinds to these beaten-up Chinese tech shares.

Technical analysis – Medium-term downtrend remains intact for Tencent

(Click to see the enlarged chart)Source: CMC Markets & TradingView as of 17 May 2022

Since its 775.50 all-time high printed on 15 February 2021, the share price of Tencent (0700) listed on the Hong Kong stock exchange has plummeted by -62% to hit a new 52-week low of 297.10 on 15 March 2022.

Thereafter, the price actions of Tencent have traded within a 3-month sideways symmetrical triangle range configuration right below its former long-term pivotal support now turning resistance at 422.20 (see weekly chart). Technical elements are not showing any clear signs of a major bottoming process at this juncture and its medium-term downtrend phase in place since 18 February 2021 high remains intact.

If the 422.20 key medium-term pivotal resistance (also close to the 200-day moving average) is not surpassed to the upside, Tencent may shape another impulsive down move to retest 297.10 before targeting the next support zone of 259.40/251.10 (a cluster of Fibonacci extension levels & the major swing low of October 2018.

On the other hand, a clearance with a daily close above 422.20 invalidates the bearish scenario for a corrective tactical rebound towards the next resistance at 486.00 and 519.00/520.25.

 

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