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Tencent: 2Q18 results disappoint

Tencent posted disappointing 2Q18 results on 15 August, which missed analyst expectations as increased Chinese regulatory scrutiny of its gaming business negatively impacted revenue. Revenue of CNY73.7bn ($10.6bn) came in below the CNY77.3bn Thomson Reuters consensus forecasts had expected and, despite being a 30% YoY rise, it was the firm’s slowest revenue growth since 2Q15. Net profit of CNY17.9bn (c. $2.6bn) was also below the CNY19.6bn expected and represented a 2% YoY decline and a 23% QoQ drop (also its first decline since 3Q05). EPS came in at CNY1.89, below the CNY1.98 which consensus forecasts had predicted.

Online gaming, accounting for c. 40% of the Group’s total revenue, has come under intense scrutiny from China’s regulators impacting this crucial division. Tencent President Martin Lau said on the conference call that from “… a revenue growth perspective, gaming is a key area of weakness, our biggest game is not monetisable,” he added that while this was “… a little out of our control, … over time we’ll solve it.” Smartphone games revenue grew 19% YoY but declined 19% QoQ to CNY17.6bn. Although daily active users (DAUs) increased, monetisation per user declined as users shifted time to non-monetised tactical tournament games, Tencent said.

The monetisation problem refers to a crackdown from China’s regulators – last week, authorities stopped Tencent from selling its popular online game, Monster Hunter: World in China. A further headwind for Tencent’s gaming business relates to another of its big hits – PlayerUnknown’s Battlegrounds (PUBG), a massive multiplayer online game that Tencent has the rights to run in China but regulators have still not approved monetisation of the game. Honor of Kings, (one of the highest-grossing mobile games in China), also faced scrutiny and last year, Tencent put a limit on the amount of time children could spend on the game following complaints from authorities. Bloomberg reported prior to these results that China’s regulators had frozen all game approvals, which could weigh on Tencent’s business. Its PC client games revenues were down 5% YoY and 8% QoQ to CNY12.9bn. In total, online games revenues (for both smartphones and PC), rose 6% YoY to CNY25.2bn.

There were also some bright spots in the results – Tencent’s other big revenue driver is its video subscription service, which also produces digital content across many of its social apps, and Tencent has a number of other services such as music streaming and a live streaming app. Subscriptions to these services rose by 30% YoY to 154mn users, while revenues from these offerings were up 14% YoY (this was still slower growth than the 34% YoY recorded in 1Q18). Revenue from online advertising across Tencent’s various websites and services advanced 39% YoY, but this was again at a slower pace than in 1Q18. WeChat, China’s most popular messaging app, saw monthly active users (MAUs) rise to c. 1.06bn (+9.9% YoY). The company said that DAUs grew at a faster pace than MAUs, reflecting “greater user engagement and stickiness,”. Revenues from Tencent’s “other” businesses (which includes cloud and payment services) rocketed 81% YoY to CNY17.5bn.

Tencent has endured a difficult 2018 so far, with the company’s share price down 11.6% YTD and down c. 23% from its 23 January peak.



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