Tencent has big expectations to beat as Chinese gaming giant prepares to report 2019 earnings amid challenges in ads, cloud computing

Louise Moon

Tencent Holdings could be one of its online game characters – its shares clawed their way out of a scary stock market dungeon, took a quick run uphill during the coronavirus lockdown in China, and recently were knocked down by the global market upheaval.

The Chinese online gaming and social-media giant will report its 2019 and fourth-quarter results on Wednesday night, after market close in Hong Kong, and analysts were very upbeat.

“It’s not just the game market. You can barely get through a day without touching one of Tencent’s applications,” said Vey-Sern Ling, senior analyst at Bloomberg Intelligence.

Tencent’s ecosystem of games, social networking, mobile payments, music and videos, as well as the cloud put it in a unique position in China, the most wired country in the world, analysts said.

“Tencent’s earning for the whole year of 2019 is expected to [see] a significant increase compared to the same period of 2018,” said Kenny Wen, wealth management strategist at Everbright Sun Hung Kai. “The result [will be] mainly driven by the value-added service business, especially for the online games revenues, which recorded 11 per cent enhancement year-on-year in the third quarter of 2019.”

A growth catalyst in 2020 will be its launch of two new games in mobile version, Dungeon & Fighter and League of Legends, Wen said.

A Bloomberg survey of 59 analysts found they expected its net profit for the year to grow 22.3 per cent to 94.7 billion yuan (US$13.5 billion) and revenue to rise 20.1 per cent to 375.5 billion yuan. For the fourth quarter, they expect Tencent’s net profit to grow 30.8 per cent to 25.8 billion yuan and revenue to rise 22.1 per cent to 103.69 billion yuan.

The boost Tencent got when tens of millions of Chinese consumers were cooped up during the country’s lockdown of cities was a nice break from 2018 and early 2019. That is when Beijing announced the establishment of a gaming regulator, froze approvals for new video games for nine months and imposed guidelines such as time restrictions on use by minors.

It also faces increased competition as well as a lull in gaming growth, simply because it already has 500 million users.

“[In] 2019, we have seen some recovery on the games front because they started releasing some new titles and some of them did very well, like Perfect World and Peacekeeper Elite,” said Bloomberg Intelligence’s Ling. “I think that trend is probably going to continue into 2020,” he said, adding that he did not expect Beijing to step in with further big restrictions.

Cloud computing, meanwhile, was “one of the fastest growing businesses they have”, he said. “Tencent is later to the game than Alibaba by five years, so the scale is smaller, but they are growing very quickly. They clearly have the advantage in drawing game developers as their customers”. E-commerce giant Alibaba Group Holding owns the South China Morning Post.

WeChat functions such as payments and mini apps, which are integral to the everyday lives of Chinese people, present opportunities for monetisation through advertising and commission from merchants who want promotion, Ling added.

In a note in January, Morningstar equity research analyst Chelsey Tam listed all three of these areas as positives for the business. Tencent will remain dominant in the online gaming business and cloud content, while online advertising through WeChat will drive earnings for the company.

But the challenges Tencent has faced over the past two years remain on investors’ minds. The developer of Honour of Kings and Peacekeeper Elite spent last year trying to recover from a disastrous 2018, when it faced a nine-month freeze on game approvals, which gutted its most profitable sector. Its share price seesawed through the year.

Business proved challenging amid an economic slowdown that saw China’s gross domestic produce (GDP) slow to a 30-year low, as well as increased competition for internet traffic and advertising from firms such as ByteDance – the owner of TikTok, the world’s most valuable start up – and Alibaba.

Tencent’s profit collapsed 13 per cent to 20.4 billion yuan in the third quarter last year, while sales from media advertising dropped 28 per cent.

In the following two months, Daiwa Securities Group, UBS, Credit Suisse and HSBC all lowered their target price ratings. While acknowledging long-term gaming and financial technology opportunities, they pointed at macro, regulatory and competitive headwinds, as well as pressure due to regulations and weak advertising revenue.

Tencent says coronavirus battle in China will give push to digital infrastructure

And although many have raised their target prices this year, including Goldman Sachs, Citi and Nomura, analysts noted two main challenges: China’s high mobile gaming population leaves little room for growth, and big advertising competition from Baidu and Alibaba.

The Hong Kong stock exchange’s 14-day relative strength index, which gauges buying sentiment, fell to 45 by Tuesday close, near the oversold marker of 30. It fluctuated through 2019 and had emerged in 2020 at a high of 69, just below the 70 market that indicates a stock is overbought.

Amid another market rout Wednesday in Hong Kong and elsewhere in Asia, Tencent fell 4.5 per cent to HK$334.

A total 53 analysts recommended a “buy” rating for Tencent, while six rated it as “hold”. None rated the stock as “sell”.

These are high standards for Tencent to meet. Not unlike the ones it sets for its video game fans.

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