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Earnings preview: Are there any chances for Tencent to reverse its downtrend?

Tencent

The article is written by Tina Teng, Kelvin Wong, Markets Analysts, CMC Markets APAC & Canada

Tencent shed 60% from its February 2021 high and hit a three-year low earlier in August due to regulatory crackdowns and the negative impact of a resurgence of Covid-19. It is expected that the largest Chinese tech company will continue to suffer from softened ad demand due to the Covid lockdowns in the second quarter, but the worst might be over.

Weak Q2 performance is expected

In the first quarter, Tencent had zero revenue growth year-on-year, with a trimmed profit margin of 18%, down from 36% a year ago. Apart from a marginal increase in its value-added service (VAS) revenue, the online advertising revenue shrunk by 18% due to the resurgence of Covid-19 in China. The second most significant revenue contributor, FinTech, and business services dropped by 10.8% from the fourth quarter of 2021. The Chinese government’s regulatory crackdown negatively affected the gaming business, with its gaming license frozen for eight months since April. 

Due to the harsh Covid lockdowns in the second quarter, Tencent’s revenue may continue to decline due to softened advertising demands and weakened gaming spending. According to Northeast Securities, Tencent’s ad revenue is expected to fall 25% year on year. The second-quarter revenue is forecasted at 134.41 billion RMB or a 3% drop year-on-year. The net profit margin is expected to be 18.8% or a 5.8% fall from a year ago.

A better second-half outlook

Despite all the negative news, the worst might have been over. With China coming out of lockdowns since June, advertising demands are expected to recover from the third quarter. The Tencent Video Dataset (TVD) may potentially bring strong ad revenue growth.

The regulatory limitation on the gaming industry may also get relief later in the year, while Tencent aims to grow its footprint in the international markets. The company has announced to launch the overseas version of the most popular game in China, “Honor of Kings”, towards the end of the year.

Overall, Tencent’s future growth trajectory is likely not spectacular due to uncertainties about China’s economic recovery. A slowdown in the growth of the world-second-largest economy may continue to restrain the share price of Tencent.  

Technical Analysis – Medium-term positive elements have emerged

Source: CMC Markets as of 16 Aug 2022 (Click to enlarge the chart)

Since its 27 June 2022 high of 400.10, the share price of Tencent (0700 HK) has tumbled by 28% to print an intraday low of 288.10 on 2 August 2022 and underperformed its benchmark Hang Seng TECH Index, which declined by a lesser magnitude of 19% over the same period.

Interestingly, the recent six weeks of decline in price actions have managed to stall at the 15 Mar 2022 swing low area, and two positive key technical elements have emerged; two consecutive weekly bullish “Dragonfly” candlestick patterns and a bullish divergence signal being flashed out by the daily RSI oscillator at its oversold region which suggests the recent downside momentum has started to wane.

Suppose the 294.70 key medium-term pivotal support holds. In that case, Tencent may see a potential minor recovery towards 340.90. A break above it opens up scope for a further push up to retest the medium-term range resistance of 400.60/422.20 in place since 17 March 2022 high that confluences with the key 200-day moving average where price actions have not broken above it since 18 June 2021.

On the other hand, a daily close below 294.70 invalidates the bullish tone for a further slide towards the 259.40/251.40 key long-term pivotal support, which is also the Oct 2008 major swing low.


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