Earnings

Tencent’s Profit Drop Drags On Chinese, Tech Stocks

Tencent

There’s a saying that Wall Street does not like surprises — and certainly not earnings surprises … at least not to the downside.

Case in point: Tencent Holdings saw its stock slide more than 3 percent in intraday trading to roughly 335 Hong Kong dollars, and its American depositary receipts (ADRs) slip more than 10 percent, on the heels of what Bloomberg termed “shockingly poor quarterly numbers.” How poor? The latest report marks the first slide in profits in roughly a decade. The profit hit came amid a strong macro headwind: As the newswire noted, there is a freeze on new game approvals in China, and no real knowledge of when that freeze might thaw.

That backdrop with the profit and stock declines acting seemingly hand in hand  underscores how tech giants that have been a major force in upward market marches have been under pressure, Bloomberg said.

The Tencent results came on a day that saw the tech-heavy NASDAQ slip 120 basis points and Chinese firms, such as NetEase and JD.com, drop in share price by an average of 2.9 percent. Alibaba was off 3 percent.

It may be the case that the Chinese giants have been slipping on this day in tandem, as Tencent’s results underscore the impact that the government can have on firms’ financial results. As has been noted before, the Chinese government has been taking steps to tighten control over its internet sector, from mobile gaming to mobile payments (as has been seen with Alibaba), even as some of the biggest firms compete more fiercely with one another for eyeballs, wallet share and, of course, game play.

By the numbers, net income was down 2 percent year over year to 17.9 billion yuan, far below the 19.3 billion yuan that had been expected by the Street. As for the top line, revenues were up 30 percent  impressive as a stand-alone growth rate, but then again, the slowest pace in three years. The 73.7 billion logged in yuan for revenue was short of the 77.7 billion that the Street expected.

So, in China, with no new game afoot, Tencent has seen a challenge to the top line. The company has to keep content (and games) fresh and new, with an attendant boost in WeChat messaging activity. The cross-pollination allows the company the name behind Fortnite, for example to sell to more than a billion users. The drop came as the company saw a 19 percent drop in mobile gaming sales.

This was enough to swamp bright spots such as payments, where the monthly active user (MAU) count came in at 800 million, with volumes up 40 percent year on year. However, as Bloomberg noted, there may be a hit to margins looming as the financial services business requires Tencent to set aside reserves.

One possible promising area is payments, where MAUs stood at 800 million in June. Bloomberg said, “Daily transaction volume was up 40 percent in the quarter. But Tencent also warned of a hit to gross margins by higher requirements on the reserves it must set aside for its financial services business.”

The vagaries of the gaming ban can be seen in the fact that, in tandem with no new game approvals on the horizon, games already out in the field can be held back. Consider the fact that the Chinese government made the company drop Monster Hunter: World (a gaming title) a few days after the game hit (virtual) shelves.

WeChat, the messaging offering, was a bright spot, as it saw MAUs grow about 10 percent year on year to just over 1 billion users, which in turn helped advertising revenues soar 39 percent.

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