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Can Tencent’s share price stay ahead of the game?

Tencent’s [TCEHY] share price has been a popular bet among investors this year. The stock hit $76.40 on 20 November, which left it towards the top end of its 52-week range of $40.80-$81.35. With Tencent’s share price up 56.1% on the year to 25 November, what has been driving its performance?

Tencent’s share price received a sentiment boost from the firm’s third-quarter earnings, which showed that revenue had increased by 29% year-over-year to CNY125.45bn ($18.4bn). These figures were broadly in line with its second-quarter performance and ahead of market expectations.

China’s largest streaming service, Tencent Music Entertainment Group, posted revenue of CNY7.58bn ahead of analyst expectations of revenue to reach CNY7.47bn, according to IBES data from Refinitiv. This success also served to bolster Tencent’s share price.

 

 

 

Further good news came with the company recording an 89% increase in net profit. Ma Huateng, Tencent CEO, pointed to the success of its strategic organisation upgrade, which he said was already seeing benefits in the earnings release.

 

Preventing monopolistic behaviour

Some observers have expressed concern that the Chinese government’s desire to increase oversight of the country’s internet industry could impact Tencent’s medium-term growth prospects.

On 10 November, China’s State Administration for Market Regulation (SAMR) published draft rules which it said were necessary to prevent monopolistic behaviour by internet platforms such as Tencent and Alibaba [BABA]. The SAMR said it wants to prevent any single platform from monopolising the market or taking steps to prevent competition.

Tencent reacted positively to the move, stating that it would work with policymakers. Speaking to analysts on an earnings call a few days before the SAMR published its draft rules, the firm’s president Martin Lau said that the new rules would have more impact on platforms that focused on transactions.

At the announcement of its third-quarter results, the company noted revenues from its cloud and other business services were affected by the lingering impact of the coronavirus pandemic, such as delays in project deployment and new contract sign-ups. “The year-on-year revenue growth rate was lower than previous quarters, which we expect to be temporary in nature,” it noted.

“The year-on-year revenue growth rate was lower than previous quarters, which we expect to be temporary in nature” - statement from Tencent

 

Other challenges facing Tencent’s share price include the prospect of increased competition following reports that Oracle [ORCL] had won ByteDance’s US TikTok operations. If this deal goes through, ByteDance will be obliged to refocus on its domestic market and Tencent’s share price could suffer from stiffer competition.

According to Alex Wong, director of asset management at Ample Capital, momentum for Tencent’s share price is stronger than for Alibaba and its longer-term growth is more promising. He suggested that, from a regulatory perspective, the concern for Tencent has eased, as it started some time ago.

David Shapiro, deputy chairman of Sasfin Securities, chose Tencent as his stock pick of the day last week, describing the company’s results as staggering. “The reason that I like Tencent is that their gaming revenue was up 45% in the quarter. But more enticing was that their mobile/smartphone gaming was up 65%,” he said.

“The reason that I like Tencent is that their gaming revenue was up 45% in the quarter. But more enticing was that their mobile/smartphone gaming was up 65%” - David Shapiro, deputy chairman of Sasfin Securities

 

In a market commentary last week, OCBC Investment Research analysts suggested Tencent management had addressed investor concerns around recent regulatory developments. On that basis, the analysts maintained their Buy recommendation on Tencent’s share price.

Zacks expects an above-average return from Tencent Music Entertainment relative to the market in the next few months. The firm says its valuation metrics show that Tencent may be overvalued and that its value score indicates it would be a bad pick for value investors, while recent price changes and earnings estimate revisions indicate Tencent’s share price may be worth watching for momentum investors.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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