Tencent
TENCENT HOLDINGS
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The giant Chinese holding company (traded at a value of $375 billion) is expected to report revenues in the second quarter totaling $19.5 billion, a decrease of 4% for the period compared to the same period last year. The slowdown is caused by the Corona restrictions that are hurting the Chinese economy and the continued challenges the company faces in the local gaming market, the net profit is expected to be affected as well and fall by 30% to 3.5 billion dollars.
The advertising and gaming market, the main markets in which Tencent operates, may be affected due to companies and brands in China reducing advertising expenses, and consumer spending on gaming is weakening. Add to that the tough regulatory environment that Tencent is dealing with and we get a perfect storm.
Tencent, which runs China’s largest messaging app WeChat, earns much of its revenue through gaming and advertising revenue, two areas likely to take a hit in the second quarter.
“We take into account that the revenues from online games and the revenues from advertising in the second quarter were affected, following global macro difficulties and the outbreak of the epidemic in China. We anticipate that the situation will cause a weakening of the demand for gaming in China,” said a Jefferies analyst in a letter published last month.
China’s economy grew by only 0.4% in the second quarter, missing analysts’ expectations. Earlier this week, China’s retail sales and output also came in below expectations, a figure that caused interest rates to drop 0.1% immediately after the release of the data.
Jefferies predicts that revenue from Tencent’s digital advertising business will drop 29% compared to the same quarter last year to $2.4 billion. A sharper drop than reported in the first quarter.
“We expect that the weakening is due to the outbreak of the epidemic and the uncertainty in the macro environment,” said the Jefferies analyst.
Gaming revenues, which make up about a third of Tencent’s total sales, will be in focus for investors. China’s gaming sector continues to face challenges. Last year, Chinese regulators said children under 18 would only be allowed to play online games for up to three hours a week and only at specific times. Tencent has said in the past that minors make up only a tiny portion of its revenue, but still, it hurts revenue.
The regulators also froze the approvals of new games in China from last July and only in April again began to give the green light to the entry of new games into gaming. In China, games have to be approved by regulators in order for gaming companies to profit from them while there is very high censorship on most games.
China Renaissance analysts reported that Tencent launched only three mobile games in the second quarter, so there will be a very weak contribution to revenue from new games. They expect online gaming revenue to be stagnant compared to the same quarter, with domestic gaming revenue down 3% and international gaming revenue up 8% year over year.
Despite the difficult challenges that Tencent faces, the Jefferies analysts are bullish about the future potential of Tencent’s activities abroad. – “Tencent has a solid pipeline of about 30 games that should be released in the coming years,” they said. , Tencent also has console games coming out. It employs multi-directional strategies in expanding abroad such as establishing local operating teams, self-development and advertising.”
Today Reuters reported that Tencent plans to sell most of its holdings worth $24 billion in the Chinese food delivery giant “Mituan”. Investors will expect to hear from Tencent management about this as well.
Tencent’s fintech and cloud businesses are also important areas for the company. It operates one of the largest mobile payment platforms in China called WeChat Pay. China Renaissance said it expects only 2% quarter-on-quarter fintech revenue growth, again due to the virus outbreak. Cloud business growth could also be hurt by “project delays and weakening online activities.”
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