Tencent, Weak Q2 Earnings Lead to Stock Decline... Limited Short-Term Rebound

[Asia Economy Reporter Minji Lee] Tencent's stock price is showing a downward trend after posting disappointing results in the second quarter. Experts say that while the possibility of a short-term earnings rebound is limited, net profit is expected to increase in the long term due to improvements in the gaming and advertising sectors.

On the 20th, Tencent's stock price stood at 315 Hong Kong dollars. Over the past month, the stock price has fallen more than 7%, which is attributed to the revenue contraction in the second quarter.

Tencent recorded revenue of 134 billion yuan in the second quarter, down 3% year-on-year. This is the first time since its listing that revenue has declined. Non-IFRS operating profit was 36.7 billion yuan, down 8% over the same period. By business segment, the VAS segment, which accounts for 53% of revenue, posted 71.7 billion yuan in revenue, down 0.5% compared to the same period last year. Both domestic and overseas games slightly declined year-on-year, while SNS grew by 7%.

Fintech and business services (accounting for 31% of revenue) recorded revenue of 44.2 billion yuan, up 1% year-on-year. Fintech showed only single-digit low growth in April due to the impact of COVID-19 but recovered to a high teens growth rate in June. Cloud revenue is estimated to have continued to decline year-on-year following the previous quarter. Researcher Park Chohwa from Daishin Securities said, “The slowdown in the external economic environment and cancellation of low-profit projects likely had an impact, but compared to Alibaba’s 10% cloud growth rate in the second quarter, Tencent’s performance was disappointing,” adding, “The gross profit margin improved to 33.3% from 32% in the previous quarter.”

The online advertising segment showed the weakest performance with revenue of 18 billion yuan, down 18% year-on-year. Researcher Park explained, “This was due to the slowdown in the external environment and weak advertising demand in industries such as internet services, private education, and gaming,” adding, “Marketing expenses decreased by 21% year-on-year as loss-making businesses such as online education, e-commerce, and game streaming were restructured and costs were cut.”

In the short term, the possibility of a rebound in the gaming and advertising sectors is limited. However, a recovery is expected in the long term. The advertising segment’s core is the newly introduced Video Account (short video service) within WeChat. Since introducing ads in July, monetization is progressing faster than expected, and it is anticipated to ramp up more quickly than WeChat Moments ads.

Expectations for game license issuance are also rising. Last month, the Chinese government issued opinions on promoting qualitative growth in foreign cultural trade. It emphasized the regular issuance of game licenses and the expansion of imports of high-quality content, which is expected to lead to an increase in the issuance of game licenses for both domestic and foreign games by major game companies. NetEase’s “Diablo Immortal,” which had its release delayed, is now launching, increasing the likelihood of “Dungeon & Fighter Mobile” being released in China.

The company’s net profit growth rate is expected to increase. The Central Political Bureau meeting also emphasized maintaining the normalization of the internet platform economy, which is positive. Researcher Jae-young Jang from NH Investment & Securities said, “Tencent is expanding its scope into the metaverse by acquiring stakes in metaverse companies and establishing a dedicated metaverse game development department,” adding, “We also expect benefits from the growth of the Chinese metaverse market.”