Tencent: New initiatives driving growth

Tencent, in which JSE-listed Naspers owns a c. 31% stake, reported robust 1Q19 results on Wednesday (15 May). Despite a slowing Chinese economy, Tencent’s 1Q19 profit came in well-above market expectations (helped by gains on its investment portfolio), while revenue was slightly below par. Rapid growth in Tencent’s newly created ‘FinTech and Business Services’ segment, comprised of payments and cloud services, helped to offset slowing gaming revenues.

Tencent reported 17% YoY growth in net profit to CNY27bn (c. $3.93bn), beating the Refinitiv consensus analyst forecast of CNY19.4bn. Profit was buoyed by a 46% YoY rise in “net other gains” (predominantly mark-to-market gains on investments) to CNY11.1bn. However, revenue was slightly below the Refinitiv consensus analyst estimate at CNY85.5bn (+16% YoY – an all-time low growth rate), as continued regulatory scrutiny weighed on its gaming segment. Tencent was negatively impacted in 2018 after China’s regulator froze new video game approvals, leading to its sharpest-ever profit drop last quarter (4Q18) and the slowest annual profit growth in 13 years. Gaming approvals restarted in December and Tencent received permission to launch a major title (Perfect World Mobile) in the quarter under review.

Smartphone gaming revenue fell 2% YoY to CNY21.2bn as the company released just one title in the quarter, vs eight in 1Q18. Management indicated on the earnings call that several new games would be released in 2Q19 and that they are “in the early stages of experimenting” with season passes for some of Tencent’s main titles in China. Season passes have already been rolled out in overseas markets and have received a “positive reception”, according to the company.

Online advertising revenue grew by 25% YoY to CNY13.4bn, roughly half the 55% YoY growth recorded in 1Q18. Tencent blamed this on a “challenging macro environment” and high comparison base.

Tencent signaled on its earnings call that, as its core business matures, it will focus on evolving initiatives (industrial services such as cloud computing, season passes for games etc.) to “revitalise growth,” according to Chief Strategy Officer James Mitchell. These initiatives currently have a depressing effect on Tencent’s margins; a trend that is expected to continue while Tencent is in investment mode.

As at the end of 1Q19, WeChat, China’s largest social media platform, had 1.1bn users (+6.9% YoY). Tencent has successfully leveraged this ecosystem into adjacent verticals, including video (both short- and long-form content) and music. Tencent’s various services had 165mn paying subscribers, in aggregate, at the end of 1Q19.

The Tencent share price is up c. 18% YTD (to its close on Thursday [16 May]).



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