Tencent frustrated after lockdown, removing crackdown growth

(Bloomberg) – Tencent Holdings Limited posted its slowest revenue gains on record, following a massive government crackdown and Chinese economic turmoil eroding growth on the Internet.

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After online advertising revenue fell 18%, sales for the three months ended March rose to 135.5 billion yuan ($ 20.1 billion), missing the average forecast. Overall growth slowed for the seventh consecutive quarter, the slowest pace since the Shenzhen company went public in 2004.

From Tencent to Alibaba Group Holdings Limited, China’s largest technology corporations are stepping into a new era of cautious expansion, more than a year after the start of the Beijing campaign that finally swept every Internet sector, from e-commerce to gaming and fintech.

Net income fell 51% to 23.4 billion yuan, despite estimates falling sharply from the sale of C-Limited’s stock in Singapore. Shares in Process NV, Tencent’s largest shareholder, have slipped more than 3% in Europe.

Attitudes toward the industry have increased in recent weeks, with investors debating whether the crackdown is moving in the right direction, or at least switching to a more sustainable pace.

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What Bloomberg Intelligence Says

2022 could mark Tencent’s low single-digit EPS profit for the second year in a row, questioning its position as China’s growth stock. Nevertheless, 2H and 2023 could still draw flames from Tencent’s bright growth embers, especially if consumer demand stabilizes, regulatory tightening eases and gaming approaches resume.

– Marvin Chen and Sufyanti Sufyanti, analysts

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Read more: Tencent, Alibaba looks like utilities after $ 1 trillion draws

Tencent has so far escaped direct scrutiny from Beijing, but has not escaped a major clampdown and economic unrest. It has slashed its market value by nearly $ 500 billion since its peak in 2021, and the company has even studied support for Beijing’s efforts to curb its once-free-wheeling Internet sector.

On Tuesday, Baidu Inc. And after a symposium involving companies including NetEase Inc., Tsar Liu He of the Chinese economy pledged support for digital platform companies and their public listings.

“On the one hand, our revenue and profit growth has slowed; On the other hand, we can use this as an opportunity to shift gears toward high-quality development, “founder Pony Ma wrote in Tencent’s Social Value Report published this week, calling it a” difficult but right thing to do. “

Online ad sales fell 18% worse than expected since the first contract was signed in the December quarter. China’s weakened economy and competition from TikTok-owned BitDance Ltd have hurt business, while last year’s big marketers, including online tutors and insurers, tightened budgets after individual regulatory crackdowns.

Tencent’s bread-and-butter gaming division – the world’s largest – has also just expanded its revenue. It is still on the waiting list for new monetization licenses, after regulators approved the first batch of domestic releases from July last month.

In light of the new reality, executives said in March that international games, cloud software and WeChat’s video accounts would be their main strategic focus. But foreign gaming sales have expanded by only 8% in terms of constant currency, which is behind the double-digit growth of the previous period, because compared to a year ago when the world was basically a lockdown.

“Like other companies operating outside of China, the post-Covid reopening damper in games is real,” said Ve-Saran Ling, a senior analyst at Union Bankier Privy. “The main takeaway is that growth could be weak for a long time, at least until 2Q22, and then there is a chance that yoy comps will start to look better in the second half.”

Tencent’s Fintech and Cloud division has become its No. 1 revenue driver. But in cities like Shanghai and Shenzhen, cloud projects were delayed after the Covid lockdown, and the 10% increase was even worse than expected after the transaction cooled down.

For now, the WeChat messaging app is still the backbone of Tencent’s vast online empire and the backbone of smartphones, and it will play a big role in monetizing and trying to offset struggling businesses like streaming and home games. In April, Tencent shut down its game streaming platform and raised fees for its Netflix-style service for the second time in almost a year, as short-video rivals entice users and marketers.

Just like Mark Zuckerberg’s Meta Platforms Inc., Tencent is jumping into the virtual world of Metavers in the long run. The Chinese company has redesigned its age-old social app QQ with customizable 3D avatars and unrealistic engine graphics, and is hiring developers to create open-world titles. But with the steady pace of investing in foreign game studios, such efforts could push margins before they pay off.

“We expect Tencent’s earnings weakness to continue on 1H2022E due to the downturn in the online gaming and online advertising business,” Shifara Samsuddin, an analyst at Lightstream Research, wrote in a note on SmartCarma ahead of the results. “At the moment, we do not see many catalysts for a strong rally in Tencent’s share price.”

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