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4 months ago
Tencent (TCEHY) turns to ByteDance in gaming showdown with NetEase
By: Investing | December 18, 2023
HONG KONG (Reuters) - Tencent Holdings (OTC:TCEHY) is relying on one-time bitter rival ByteDance to promote its most important video game release in years, in a sign of warming relations as well as intensifying competition as China's gaming industry returns to growth.
Tencent released on Friday mobile party game "DreamStar" that it hopes to challenge "Eggy Party", a similar offering from NetEase (NASDAQ:NTES) which has become a surprise hit this year with 100 million monthly active users.
Analysts expect DreamStar to earn up to 6 billion yuan ($842 million) in its first year, while they forecast Eggy Party, which owes much of its success to advertising on ByteDance platforms, to earn 8 billion yuan for NetEase this year.
In a battle to defend its status as China's biggest gaming firm,Tencent has chosen to promote Dreamstar on ByteDance's popular advertising platforms despite the two's rancorous history in barring one another from their platforms.
About 38% of Tencent ads for DreamStar were put on ByteDance's online ad service Pangolin in the last 30 days, making it the top ad service Tencent has spent on for the game, according to data tracking firm DataEye.
Its decision to rely heavily on Pangolin is remarkable considering that Tencent has its own ad network and various promotion channels within its product ecosystem.
Tencent has put only 12% of DreamStar ads on its own ad network Youlianghui, according to DataEye.
The advertising layout is part of Tencent's plans for a 1.4 billion yuan investment to build out DreamStar's ecosystem to ensure its success.
That strategy has also seen Tencent begin to let video game live-streamers to stream on ByteDance platforms.
Zhang Daxian, China's top live-streamer who became famous through playing Tencent's "Honor of Kings" game, started his channel on a ByteDance platform earlier this month and previewed DreamStar, a scenario unthinkable to many fans just a year ago.
For years, Tencent and ByteDance were locked in a series of lawsuits against each other. In 2021, ByteDance sued Tencent for restricting users from sharing content from Douyin - TikTok's sister app in China - on Tencent's apps, citing anti-monopoly law.
In the same year, Tencent sued ByteDance for featuring footage of Honor of Kings on a ByteDance platform, citing copyright infringement.
The apparent thaw in their relationship comes as ByteDance recently decided to wind down its gaming business to focus on its core platform operations, marking a retreat from its competition with Tencent and NetEase in gaming.
China's video games market returned to growth this year as domestic revenue rose 13% to 303 billion yuan, putting Beijing's eight-month industry crackdown two years ago in the rear-view mirror.
($1 = 7.1255 Chinese yuan renminbi)
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4 months ago
Tencent launches party game 'DreamStar', analysts say poses a threat to NetEase
By: Investing | December 14, 2023
HONG KONG (Reuters) - Chinese tech giant Tencent Holdings (OTC:TCEHY) on Friday launched "DreamStar", a new party game that has been widely anticipated by users and pegged by analysts to pose a threat to domestic arch rival NetEase (NASDAQ:NTES).
"DreamStar", in which gamers play as cartoon characters to race in an obstacle course, is seen as Tencent's move to take on NetEase' massively popular game "Egg Party", a surprise hit which has helped lift NetEase shares by more than 40% this year.
JPMorgan analysts said in a note on Thursday that the launch of "DreamStar" could impact NetEase revenue by 2% to 3%. The bank also trimmed its forecast for NetEase revenue for the next two quarters by 4% and 5% respectively.
"Egg Party" is forecast to be on track to earn an annual revenue between 7 billion yuan and 8 billion yuan ($980 million and $1.1 billion) this year, according to a Goldman Sachs note.
As Tencent's answer to "Egg Party", Goldman expects "DreamStar" to earn between 5 billion and 6 billion yuan in its first year.
NetEase's market capitalisation reached $67 billion on Friday, a day after surpassing food delivery giant Meituan to become China's fourth-biggest internet company.
Tencent remains China's biggest internet company. It is the world's biggest video games provider and it operates China's leading social network app WeChat.
Tencent has been in search for new hit gaming titles as competition from other game developers like NetEase and miHoYo, producer of "Genshin Impact", intensifies. Tencent unveiled its most ambitious console title, "Last Sentinel", this month.
($1 = 7.1252 yuan)
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5 months ago
Tencent's Business Is Thriving And It Has Taken Precautions Against The U.S. Chip Export Curbs
By: Markets & Mayhem | November 21, 2023
Tencent Holdings Limited (OTC: TCEHY) posted impressive third quarter results last week. The world's largest video game company and operator of the WeChat messaging platform showed that the gaming segment rebounded from China’s tech regulatory crackdown, along with shining advertising sales. Earlier this month, Tencent revealed it made a deal with Meta Platforms (NASDAQ: META) to sell its VR headsets. This move will allow Meta to return to China and face Apple Inc (NASDAQ: AAPL) whose new mixed-reality headset Vision Pro should go on sale early next year.
Tencent’s Third Quarter Highlights
Tencent posted a revenue of 154.6 billion yuan which equates to about $21.4 billion, in line with estimates. This is Tencent’s third consecutive quarter of revenue growth.
Domestic games revenue rose 5%, driven by titles such as "Lost Ark" and "Valorant", which Tencent launched in July and for the first time in China.
Online advertising business reported revenue rose 20% on the back of strong demand for advertising in its video content. Over the recent quarter, e-commerce companies have "become a much bigger contributor to Tencent’s ad revenue. Tencent also noted that these companies tend to advertise in the second half of the year.
Tencent’s second-largest segment, financial technology business, also reported a 16% rise as wealth management services and online transactions improved.
Although third quarter margin continued to improve as it got closer to 50% with Tencent eliminating unprofitable business segments, net profit declined 9% to 36.1 billion yuan.
A Deal With Meta
As Wall Street reported earlier in the month, Meta signed a deal with Tencent to sell a new low-cost version of its virtual-reality (VR) headset in China as of late next year. This move marks Meta's return to a market where its platforms Facebook and Instagram are blocked. Besides returning to China after 14 years, Meta gets to compete with TikTok-owner Bytedance, which makes the VR headset Pico. Wall Street Jounral reported that Meta is planning to use lenses in the headset that are cheaper than those in the Quest 3 for the Chinese market...
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6 months ago
Tencent’s Record Buybacks Are Not Enough to End $43 Billion Rout
By: Markets & Mayhem | October 17, 2023
Tencent Holdings Ltd. has returned about $24 billion to shareholders via buybacks and dividends this year. But even that won’t convince investors that it’s due for a turnaround following a $42 billion market value wipeout.
Shares of the Chinese gaming company have fallen more than 27% since its January high, trailing the Hang Seng Tech Index despite it buying back more shares than any other firm in Hong Kong this year. Investors remain cautious that broad global selling of Chinese assets and a sputtering economy will remain key pressure points.
“That the stock has underperformed is really emblematic of the investor disillusionment with China,” said Vey-Sern Ling, managing director at Union Bancaire Privee. “Tencent stock can start outperforming only when investor confidence in China returns.”
In total, Tencent has spent $4 billion in buybacks and another $20 billion across cash dividends and distributed shares in food-delivery firm Meituan, according to Bloomberg calculations.
Shares of the company gained as much as 1.1% on Tuesday as Apple Inc.’s Tim Cook showed up at a Tencent gaming tournament in China, endorsing one of the biggest earners on the app store. It ended the Hong Kong session up 0.3%.
There are clear reasons why investors are concerned. Tencent’s fintech and business services segment, which accounts for about one-third of total revenue, likely grew at a slower pace last quarter as offline payment volumes were hit by slower retail sales, according to HSBC Holdings Plc’s Charlene Liu. The bank also trimmed its 2023 games revenue growth forecast given contribution from new launches may take longer to ramp up.
Still, optimism is slowly building among some analysts as Tencent shifts its business mix toward higher-margin segments such as mini-games and video accounts, while reducing exposure to its less profitable video-streaming business. The recent boost in share buybacks may also provide some price support even as its biggest shareholder trims its stake, according to Morgan Stanley.
Tencent’s forward earnings forecast is at a historic high and the company’s shares remain the most recommended in Asia. The stock has 67 buy recommendations and zero sell ratings, according to data compiled by Bloomberg...
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7 months ago
Tencent unveils Hunyuan foundation AI model for enterprises as public debut of internet giant's chatbot remains on hold
By: South China Morning Post | September 7, 2023
Chinese video gaming and social media giant Tencent Holdings has launched its foundation artificial intelligence (AI) model called Hunyuan, as the country's most valuable company bets on its vast ecosystem to help drive the adoption of more ChatGPT-like services across the mainland.
Hunyuan, a large language model (LLM) that has more than 100 billion parameters and been pre-trained with over 2 trillion tokens, is now available for enterprises in China to test and build apps via the company's cloud-computing arm Tencent Cloud, according to a Thursday announcement by Tencent vice-president Jiang Jie at the main forum of the company's 2023 Global Digital Ecosystem Summit in Shenzhen.
A foundation model is a deep-learning algorithm, trained on mountains of raw data from the internet, that can be adapted to accomplish tasks in various AI applications. An early example of a foundation AI model is the LLM GPT-3 used by ChatGPT creator OpenAI.
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Tencent's Hunyuan provides a range of functions, including image creation, copywriting and text recognition, that can be applied in multiple industries such as finance, social media, e-commerce and video gaming...
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8 months ago
Tencent Stock (TCEHY): Bear vs. Bull
By: Motley Fool | August 22, 2023
• The Chinese tech giant remains a divisive investment.
Tencent (TCEHY -1.17%) posted its second-quarter report on Aug. 16. The Chinese tech giant's revenue rose 11% year over year to 149.2 billion yuan ($20.6 billion) but missed analysts' estimates by 2.5 billion yuan. Its net profit grew 41% to 26.2 billion yuan ($3.6 billion), but also missed the consensus forecast by 7.3 billion yuan. Tencent's stock dipped slightly after the report, but it remains up 3% for the year.
Let's review the key numbers and see if the bulls or bears are likely to gain the upper hand in the period ahead.
The key numbers
During the second quarter, Tencent generated 50% of its revenue from its value-added services (VAS) business, which collects fees from its video games, social media apps, and streaming media platforms. Nearly 33% of its revenue came from its fintech and business services division, which houses its WeChat Pay digital payments platform, Tencent Cloud platform, and other enterprise-oriented services. The remaining 17% came from its online advertising business, which sells ads across all of its websites, apps, and streaming services. Here's how its three core businesses fared over the past year...
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9 months ago
Will Tencent Holdings (TCEHY) Regain Favor Among Investors?
By: Barchart | August 1, 2023
After plunging to a 6-year low in October 2022, Tencent Holdings Ltd (TCEHY) rallied to a 17-month high in January. However, the stock has since moved sideways as the company has fallen out of favor with Chinese investors.
According to Bloomberg data, onshore investors have sold Tencent Holding shares on a net basis for two months in a row (June-July) for the first time since 2021. Investors unloaded $375 million of Tencent shares in July through trading links between the Hong Kong, Shenzhen, and Shanghai exchanges.
Tencent Holdings, China’s most valuable company, has been weighed down by concerns about its outlook and selling by its largest shareholder. Beijing Eastern Smart Rock Asset Management said, despite the company still making money, it’s not a good time to buy Tencent Holdings, given that selling by its largest shareholder is weighing on the stock. Also, “Mainland investors all agree Tencent is cheap, but the price moves of 2022 have just proven that things can go quite extreme in the Hong Kong market.”
The upside momentum in Tencent Holdings has been hampered since June when Prosus NV, Tencent’s largest shareholder, announced that it was offloading its stake in the company. Chinese investors, who have supported Tencent holdings since it was listed in Hong Kong twenty years ago, have pulled back on their support for the stock. Since June, shares of Tencent Holdings are up by +15%, underperforming the Hang Seng Tech Index, which is up by +28%. Forsyth Barr Asia Ltd said investors may have moved out of Tencent to buy some higher beta names amid the recent risk-on sentiment in the China market.
The next test for Tencent Holdings will be its Q2 earnings report due in the middle of this month. There are signs that the company’s outlook is improving. Tencent is expected to report a +14% y/y increase in Q2 revenue due in part to solid gaming revenue growth. Analysts also remain optimistic about Tencent Holdings's prospects, as Bloomberg data shows that analysts have 70 buy ratings on the stock and just one sell rating.
Although most analysts remain upbeat on Tencent Holdings, some are cautioning that it may take time for the stock to recover. JPMorgan Chase said that while the company should deliver a “solid quarter,” it may take time for share prices to recover, given the weak sentiment. Also, Bloomberg Intelligence said, “While second-quarter numbers look to be in the bag for most Chinese Internet companies, including Tencent, we think expectations are still too high and see a risk China’s Internet companies could disappoint into the fourth quarter.”
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9 months ago
Alibaba, Tencent shares rise as investors bet China's tech crackdown is over
By: Investing.com | July 9, 2023
HONG KONG (Reuters) -Alibaba Group and Tencent shares rose in Hong Kong on Monday after China's $984 million fine against the Jack Ma-founded Ant Group appeared to signal the end of a regulatory crackdown on the country's technology sector.
Following the penalty on Friday, the Alibaba (NYSE:BABA) affiliate announced a share buyback that values the fintech a 75% discount to the valuation touted in an abandoned initial public offering (IPO) plan, but is seen as providing liquidity and certainty to investors.
The abrupt shelving of Ant's IPO in late 2020 had heralded the start of a wide-ranging clampdown by Beijing on industries ranging from technology to education, as regulators sought to assert their authority over what they deemed to be excesses and bad practices emerging from years of runaway growth.
The scrutiny left decades-old firms and startups alike operating in a new, uncertain environment and wiped billions off share prices, ensnaring companies from online retail giant Alibaba to gaming company Tencent and food delivery group Meituan.
Besides Ant, the Chinese authorities also announced on Friday they had fined Tencent's online payment platform Tenpay nearly 3 billion yuan ($414.88 million) for committing violations in areas such as customer data management.
The People's Bank of China (PBOC) said on Friday that most of the prominent problems for platform companies' financial businesses had been rectified and regulators would now shift their focus from focusing on specific companies to overall regulation of the industry.
Alibaba's Hong Kong-listed shares were up nearly 4% by 0230 GMT on Monday, outpacing a 1.3% gain for the broader market, while Tencent's shares were up 1%.
"Their share prices have strongly rebounded today mainly driven by the expectation that regulatory pressure from mainland government will ease," said Dickie Wong, Kingston Securities executive director.
ANT GROUP VALUATION SLASHED
Alibaba, which spun off Ant 11 years ago and has a 33% stake, said on Sunday it was considering whether to participate in the buyback.
Alibaba's U.S.-listed shares rose 8% on Friday after the penalty, one of the largest-ever fines for an internet company in China, was delivered.
Ant and its subsidiaries had violated laws and regulations in areas including corporate governance, financial consumer protection, payment and settlement business, as well as anti-money laundering obligations, the PBOC said.
Ant said on Saturday it proposed to all of its shareholders to repurchase up to 7.6% of its equity interest at a price that represents a group valuation of about $78.5 billion.
That compared to the $315 billion valuation in 2020 for what was set to be the world's largest IPO, had it not been derailed at the last minute by Chinese regulators.
The finalisation of Ant's penalty is seen as paving the way for the firm to secure a financial holding company licence, lift its growth rate and eventually revive its plans for a stock market listing.
However, analysts are questioning whether Ant will press ahead with a listing in the near future.
"According to the company, the reason for the buyback is providing liquidity to existing investors and attracting and retaining talented individuals through employee incentives," said Oshadhi Kumarasiri, a LightStream Research analyst who publishes on Smartkarma.
"Ant could have achieved both these objectives through an IPO....This means IPO is essentially put on hold."
($1 = 7.2310 Chinese yuan renminbi)
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10 months ago
Tencent jumps on ChatGPT bandwagon by rolling out LLM for corporate clients, including state media
By: South China Morning Post | June 20, 2023
Chinese social media and gaming giant Tencent Holdings has launched its industry-oriented large language model (LLM) service aimed at a wide array of traditional sectors from finance to media, making it the latest of China's Big Tech firms to join the ChatGPT-frenzy.
The Shenzhen-based company's cloud arm launched its LLM as a model-as-a-service [MaaS] solution at a technical event held on Monday in Beijing, according to a post published to its official WeChat account.
LLMs are deep language learning models that respond to textual user prompts in a human-like fashion, and provide the technology underpinning for ChatGPT, the chat bot developed by Microsoft-backed start-up OpenAI.
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Tencent Cloud's LLM solutions will cater to industries ranging from finance, media, travel to education, with clients including China's state media China Media Group, the Shanghai University, and Fujian Big Data Group among others, according to the WeChat post.
Together with clients, the company has launched over 50 LLM-enabled industrial solutions covering over 10 industries, Tang Daosheng said at the event, a senior executive vice-president at Tencent and chief executive of its cloud and smart industries group.
"Tencent will keep opening its ecosystem to provide quality [LLM] services for corporate clients," said Tang, who added that the company will assist its clients in training multimodels and speed up exploration of applying LLMs in more industrial scenarios.
Tencent's foray into the local LLM arena will pit it against rivals including Baidu and Alibaba Group Holding, which are both looking to roll out their respective LLM applications for wider adoption among many businesses. Alibaba owns the Post.
ChatGPT's success has goaded global tech firms into an artificial intelligence (AI) arms race, with Chinese Big Tech firms falling over themselves to develop rival services.
Baidu was among the first domestic firms to launch a competitor service called Ernie Bot in March, with a promise to embed the AI chatbot into its existing services, including search.
At the March launch event, the Chinese search engine giant said that more than 650 companies have signed up to embed Ernie Bot into their services.
Alibaba's cloud business, meanwhile, has also started baking its ChatGPT-like artificial intelligence (AI) into a range of service offerings, including meeting assistant Tingwu and Slack-like office collaboration platform DingTalk.
Other than the industrial LLM service launched on Monday, Tencent is also working on a foundational AI model dubbed Hunyuan, which is yet to be released. Tencent founder and CEO Pony Ma Huateng, said earlier that his company was in no rush to launch unfinished products.
"[AI] is a once-in-a-century opportunity like the invention of electricity during the industrial revolution," Ma said at the company's latest earnings call in May.
"In the grand scheme of things, introducing the light bulb a month earlier wasn't that important. The key [for us now] is to build a solid foundation of algorithms, computing power, data and more importantly, use cases."
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10 months ago
What Makes Tencent Holding Ltd. (TCEHY) a New Strong Buy Stock
By: Zacks Equity Research | June 8, 2023
Tencent Holding Ltd. (TCEHY) appears an attractive pick, as it has been recently upgraded to a Zacks Rank #1 (Strong Buy). This upgrade is essentially a reflection of an upward trend in earnings estimates -- one of the most powerful forces impacting stock prices.
The sole determinant of the Zacks rating is a company's changing earnings picture. The Zacks Consensus Estimate -- the consensus of EPS estimates from the sell-side analysts covering the stock -- for the current and following years is tracked by the system.
Since a changing earnings picture is a powerful factor influencing near-term stock price movements, the Zacks rating system is very useful for individual investors. They may find it difficult to make decisions based on rating upgrades by Wall Street analysts, as these are mostly driven by subjective factors that are hard to see and measure in real time.
Therefore, the Zacks rating upgrade for Tencent Holding Ltd. basically reflects positivity about its earnings outlook that could translate into buying pressure and an increase in its stock price.
Most Powerful Force Impacting Stock Prices
The change in a company's future earnings potential, as reflected in earnings estimate revisions, and the near-term price movement of its stock are proven to be strongly correlated. That's partly because of the influence of institutional investors that use earnings and earnings estimates for calculating the fair value of a company's shares. An increase or decrease in earnings estimates in their valuation models simply results in higher or lower fair value for a stock, and institutional investors typically buy or sell it. Their transaction of large amounts of shares then leads to price movement for the stock.
For Tencent Holding Ltd. rising earnings estimates and the consequent rating upgrade fundamentally mean an improvement in the company's underlying business. And investors' appreciation of this improving business trend should push the stock higher.
Harnessing the Power of Earnings Estimate Revisions
Empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock movements, so it could be truly rewarding if such revisions are tracked for making an investment decision. Here is where the tried-and-tested Zacks Rank stock-rating system plays an important role, as it effectively harnesses the power of earnings estimate revisions.
The Zacks Rank stock-rating system, which uses four factors related to earnings estimates to classify stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), has an impressive externally-audited track record, with Zacks Rank #1 stocks generating an average annual return of +25% since 1988. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here >>>>.
Earnings Estimate Revisions for Tencent Holding Ltd.
For the fiscal year ending December 2023, this company is expected to earn $2.13 per share, which is a change of 21% from the year-ago reported number.
Analysts have been steadily raising their estimates for Tencent Holding Ltd. Over the past three months, the Zacks Consensus Estimate for the company has increased 9%.
Bottom Line
Unlike the overly optimistic Wall Street analysts whose rating systems tend to be weighted toward favorable recommendations, the Zacks rating system maintains an equal proportion of 'buy' and 'sell' ratings for its entire universe of more than 4000 stocks at any point in time. Irrespective of market conditions, only the top 5% of the Zacks-covered stocks get a 'Strong Buy' rating and the next 15% get a 'Buy' rating. So, the placement of a stock in the top 20% of the Zacks-covered stocks indicates its superior earnings estimate revision feature, making it a solid candidate for producing market-beating returns in the near term.
The upgrade of Tencent Holding Ltd. to a Zacks Rank #1 positions it in the top 5% of the Zacks-covered stocks in terms of estimate revisions, implying that the stock might move higher in the near term.
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11 months ago
Tencent’s Sales Rebound Though Concerns Persist on China Outlook
By: Zheping Huang | May 18, 2023
Tencent Holdings Ltd. posted its fastest pace of revenue growth in more than a year but earnings missed estimates, reflecting an uneven internet sector recovery during China’s post-pandemic reopening.
China’s most valuable company grew online advertising by 17% as a gradual resumption of marketing fuels the business for sector leaders including Baidu Inc. Yet analysts had projected a sharper bounceback as the world’s No. 2 economy let down years of Covid Zero barriers. Tencent’s shares slid as much as 3.9% in Hong Kong.
Investors remain cautious after a year during which Tencent and its peers barely grew after regulatory crackdowns and Covid restrictions choked off the consumer and corporate spending. Mainstay internet businesses like advertising and gaming are only now emerging from their historic trough, while big tech firms have been forced to push aggressive cost cuts to endure an uncertain macroeconomic environment.
To revitalize the business, Tencent aims to integrate artificial intelligence capabilities across its suite of products from WeChat to online media, calling the technology a “growth multiplier.” ChatGPT, now a global phenomenon, triggered a race among Chinese tech firms to catch up. But the Shenzhen-based firm appears to lag behind rivals like Alibaba Group Holding Ltd. and Baidu, both of which have announced ChatGPT-style platforms and triggered a frenzy among investors.
President Martin Lau joined a number of technology executives — including OpenAI’s Sam Altman — in publicly welcoming regulation of the burgeoning space, in China or elsewhere. The company has been careful to stress its compliance with Beijing’s guidelines since gaming crackdowns of past years threatened to sap its business.
“We’re making good progress, and if you look into the different components, the model building is progressing well,” Lau told analysts on a conference call. It’s using “high-quality public data, as well as high-quality public data within our ecosystem.”
Revenue rose 11% to almost 150 billion yuan ($21.4 billion) for the three months ended March, exceeding the 146.29 billion yuan average forecast. But the net income of 25.8 billion yuan fell short of projections.
Tencent and peers like Alibaba, JD.com Inc., and Baidu are watched for clues to the health of Chinese business sentiment and consumption. JD.com’s revenue barely rose during the March quarter, but the more advertising-dependent search leader Baidu returned to double-digit growth. WeChat operator Tencent itself had only just resumed expanding revenue in the December quarter after months of decline.
Investors have flip-flopped on Chinese tech stocks this year, first buying into the belief that Beijing would rally the giant sector to boost the world’s No. 2 economy in 2023. But cheerleading by officials didn’t translate into concrete policy and signs have since grown that the country’s nascent economic recovery may already be petering out.
Tencent faces more specific challenges as well. It has yet to find its next big gaming success in China after Honor of Kings and Peacekeeper Elite cemented its lead in the pre-Covid era. The company aims to fill its long-empty pipeline in 2023 with hits like Valorant after Beijing’s censors resumed licensing approvals last year. Such new launches will test a rapidly saturating domestic market, where younger players are increasingly drawn to up-and-comers like anime specialist Mihoyo.
“Investors care more about geopolitics and China macro than stock specifics now,” said Vey-Sern Ling, managing director at Union Bancaire Privée...
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12 months ago
Is Tencent (TCEHY) Stock a Buy?
By: Motley Fool | April 20, 2023
This giant is still not done yet in its quest to build its empire.
The last two years have been awful for Tencent Holdings Limited (TCEHY -2.37%). Once a darling, the tech conglomerate's stock price almost halved from its peak of around $90 per share.
With its stock price much cheaper today, should investors take a bite of this leading Chinese tech company? Let's explore this further in the article.
Tencent's recent performance has been disappointing.
Tencent has arguably had one of the best long-term track records for growth. Since its initial public offering (IPO) in 2004, revenue and net profit have grown by an annualized rate of 44%.
Its flawless performance, however, fell short lately as it delivered its first-ever annual decline in revenue. Net profit for the year performed worse, down by 17% year over year. The weaker performance was across the board, except for the fintech and business services segment, which reported a slight revenue increase. The regulatory crackdown on online learning and internet industries in China, and the ongoing negative impact of COVID-19 were some of the main drivers behind its weak performance.
It did not help that one of the central themes from Tencent throughout 2022 was about improving efficiency and controlling costs. In a way, it signaled to investors that the company would unlikely resume the kind of growth it had experienced in the first 16 years since its IPO.
Don't get me wrong. There is nothing wrong with a company improving its cost structure and efficiency. On the contrary, such a move was necessary during a challenging environment. But for Tencent's diehard fans, it might be disheartening to think that the company's hyper-growth days might be over.
Tencent's long-term growth prospects remain attractive
Let's face it. No company can continue to grow at 44% forever. And at its size -- $80 billion annual revenue -- Tencent is already a giant, so it's natural that its growth slows down over time.
Still, there are good reasons to believe that the company can continue to grow -- albeit slower -- by leveraging its twin engine of the franchise business and external investments.
The former relies on its social media networking services (mainly WeChat and QQ) and 1.3 billion monthly active users (MAU). As the dominant messaging service in China, Tencent can leverage its user base to offer an ever-expanding catalog of services to improve monetization. It already provides services like payments, gaming, online video, e-commerce, and music and is well-positioned to add new products over time.
On top of that, Tencent can rely on its capital allocation skills to divert unused cash into external investments. JD.com, Pinduoduo, Meituan, and Sea Limited are examples of Tencent's successful past investments. The beauty of this strategy is that Tencent has the flexibility to invest anywhere globally that it sees fit and in any company -- both listed and private -- across multiple industries. Think of it as Berkshire Hathaway but for technology companies.
With its twin engine for growth, Tencent has plenty of opportunities to allocate capital to grow shareholder value in the coming years.
So is Tencent stock a buy?
Tencent faces short-term headwinds from the Chinese government crackdown and the generally weak external economy. However, the tech behemoth should resume its upward trajectory in the longer term by growing its internal businesses and investment portfolio.
On balance, I'm cautiously optimistic about the company's prospects over the next few years. And with the stock trading at a reasonable price-to-earnings (PE) ratio of 16, I don't think it's too irrational for long-term investors to buy stock in the company.
Still, investors should expect a volatile ride ahead.
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1 year ago
Tencent says focus on cost-cutting, core business after first revenue fall
By: Josh Ye | March 22, 2023
HONG KONG (Reuters) -Tencent Holdings on Thursday said it would restrict its focus to its core business, while maintinaing cost-cutting and improving efficiencies, as it reported its first drop in annual revenue to date.
The world's largest video game company and operator of the WeChat messaging platform posted revenue of 554.55 billion yuan ($81 billion) for 2022, down 1% from a year earlier, after China's economic slowdown due to the pandemic and a long-running regulatory crackdown dented profits.
Analysts on average had expected 555.15 billion yuan, according to Refinitiv.
Profit attributable to equity holders fell 16% to 188.24 billion yuan for the year versus a consensus estimate of 114.19 billion yuan.
Tencent Chair and CEO Pony Ma told reporters on a call the company would focus this year on getting more out of existing core businesses, rather than on "trying to do everything" and on operating in "red ocean markets", where competition is intense.
"We hope that our entire business management team and technology will be more focused," he said. "I think this is very important because we can see that focus and making breakthroughs are very key to overall development."
The business outlook is uncertain in the world's largest gaming market after two years of regulatory crackdowns, but sector participants are hopeful of a recovery as regulators have resumed granting publishing licences since late last year after a months-long freeze.
Unlike in most other countries, video games need approval from regulators before release in China.
The crackdown has changed the operating environment for China's tech giants as regulators have tightened scrutiny over monopolistic behaviour and companies' handling of user information.
Martin Lau, president of the company, told a later call with analysts that regulations are being normalised and support for platform companies should improve this year.
"[Chinese president Xi Jinping recently] mentioned supporting platform companies to show competence, creating employment, driving consumption and international competition," he said, "The premier also highlighted the private sector would have a significant potential in the China economy."
ADVERTISING BUSINESS PICKS UP
Helping to offset the losses in domestic gaming and fintech, Tencent's online advertising business showed a surprisingly strong recovery in the fourth quarter, with revenue for the segment rising 15%, and contributing to a 1% rise in the group's revenue overall for the quarter ended December.
China's city lockdowns intensified in the weeks to early December when the country abruptly ended its zero-COVID policy, unleashing a wave of infections, which heavily disrupted the economy and caused many deaths.
Charlie Chai, an analyst with 86Research, said Tencent's performance as a whole was "lukewarm", but the advertising segment "shrugged off the COVID challenge and delivered industry-beating growth".
During the media call, Lau also spoke about the company's forays into generative artificial intelligence, which has seen a surge in global interest, driven by the popularity of Microsoft-backed startup OpenAI's chatbot ChatGPT.
Reuters reported last month that Tencent was working on a ChatGPT-like chatbot named the "HunyuanAide" that will incorporate Tencent's Hunyuan AI model.
Lau said the company was rapidly advancing its proprietary foundation model Hunyuan and planned to gradually roll out its own AI foundation models.
Tencent's chief strategy officer James Mitchell said that Tencent was ready to bear the large cost associated with training AI models even though it is focused on cost-cutting in other areas.
The United States in October announced export controls on high-end computer chips to China to try to contain AI development in the country, but Mitchell said Tencent has enough chips ready to develop its AI models.
($1 = 6.8887 Chinese yuan)
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1 year ago
Tencent Holdings Looks To Maintain Its Upside Momentum
By: Barchart | March 21, 2023
Since tumbling to a 6-year low in October, shares of China’s Tencent Holdings (TCTZF) have more than doubled to a 1-year high. Tencent Holdings has rallied on anticipation of future sales streams and optimism that the Chinese government will keep its promise of supporting the private sector. As a result, Tencent Holdings is up more than +8% this quarter, even as peers Alibaba Group Holding (BABA) and JD.com (JD) remain in the red.
According to analysts’ estimates, Wednesday’s quarterly earnings report for Tencent Holdings is expected to show Q4 revenue growth rose +0.2% after two quarters of contraction. Revenue growth is then expected to accelerate 6.7% in Q1 as the Chinese economy reopened from Covid lockdowns. Since the start of this year, analysts have raised their price target for Tencent Holding by +17%, citing a resumption of new game approvals, recovery in consumption, and the growing popularity of its WeChat video feed.
The increasing popularity of Tencent Holdings TikTok styled WeChat video feed is expected to boost ad sales and revenue for the company. Last year, the number of views of the WeChat video feed tripled, and executives forecast 1 billion yuan ($135 million) of ad sales through the feature in Q4. Analysts also expect that the post-Covid recovery in China will boost consumer and corporation spending on entertainment and advertising.
An easing of China’s regulatory crackdown on online video games is also helping to push shares of Tencent Holdings higher. The company’s new blockbuster video games Valorant and Pokemon Unite are in the pipeline after Tencent received approval from China’s regulators for new video games in December. On Monday, China’s online gaming regulator approved 27 more games, a positive factor for the online gaming industry. The optimism over the new games has boosted earnings estimates for Tencent Holdings. According to Bloomberg data, forward earnings estimates have risen by more than +5% this year, while analysts’ targets suggest a +29% increase in the company’s stock price over the next 12 months.
Some analysts are concerned that China may once again tighten scrutiny of major internet companies should the economy return to its pre-Covid pace of growth. Also, Chinese regulators last month said they are studying measures to curb addiction among Chinese youths of watching short videos. However, CMB International Capital said, “there are still a lot of bright spots that may bring upside surprises” for Tencent Holdings. “Also, the company could resume share buybacks after earnings.”
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1 year ago
Metaverse layoffs continue to mount as Tencent dismisses 300 employees
By: Jordan Finneseth | February 17, 2023
The metaverse continues to challenge even its most committed companies as Tencent, the tech firm behind the WeChat social media platform and China’s largest company by market cap, is reevaluating the approach to its metaverse offering and scrapping plans to launch virtual reality hardware.
According to a report from Reuters, the Chinese tech giant’s metaverse unit is now in cost-cutting mode amid worsening economic conditions and the broader struggles of the cryptocurrency ecosystem.
Tencent launched its “extended reality” XR unit in June as part of an ambitious plans to build virtual reality software and hardware, hiring 300 people to make it a reality.
The firm developed a concept for a ring-shaped handheld game controller, but issues with profitability – with internal forecasts predicting the XR project wouldn’t make money until 2027 – and the large investment required to produce a competitive product hampered its progress and prompted Tencent to alter its strategy.
A lack of promising games and non-gaming applications was also cited by one source as a reason for the shift in focus. "Under the company's new strategy as a whole, it no longer quite fit in," the source said.
All sources quoted in the Reuters story declined to be named as the information is confidential.
Tencent also had to walk away from plans to acquire gaming phone maker Black Shark, which was intended to beef up its hardware push and add 1,000 people to the unit, due to the shift in strategy and increasing regulatory scrutiny that would have required a lengthy review process.
On Thursday, Tencent confirmed that it would be making some personnel adjustments and notified the 300 staff members of the XR unit that they have been given two months to find new internal or external opportunities. The company pushed back against rumors that it was disbanding the XR unit entirely, saying that it was making adjustments to some business teams as its development plans for hardware had changed.
With this development, Tencent joins Microsoft and Facebook among the ranks of large firms that have recently shifted their metaverse strategy in the wake of economic struggles. Last Friday, Microsoft announced that it would be shutting down a team that was formed only four months ago to help customers use the metaverse in an industrial setting.
Facebook’s parent company Meta has also had to reduce its labor force as part of a cost-cutting initiative, announcing back in November that it would be laying off 13% of its workforce, or more than 11,000 employees. All sectors of the company will be affected by the layoffs, including Reality Labs, the unit responsible for developing augmented reality (AR), virtual reality (VR), and prototypes in emerging technologies such as mixed reality and brain-computer interfaces.
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1 year ago
Tencent scraps plans for VR hardware as metaverse bet falters - sources
By: Investing.com | February 17, 2023
HONG KONG (Reuters) -Tencent Holdings is abandoning plans to venture into virtual reality hardware, as a sobering economic outlook prompts the Chinese tech giant to cut costs and headcount at its metaverse unit, three sources familiar with the matter said. The world's largest video game publisher had ambitious plans to build both virtual reality software and hardware at an "extended reality" XR unit it launched in June last year, for which it hired nearly 300 people. It had come up with a concept for a ring-like hand-held game controller, but difficulties in achieving quick profitability and the large investment needed to produce a competitive product were among factors that prompted a shift away from that strategy, two of the sources said. One of the sources said the XR project was not expected to become profitable until 2027, according to an internal forecast. The second source said the unit also had a lack of promising games and non-gaming applications.
The sources declined to be named as the information is confidential. "Under the company's new strategy as a whole, it no longer quite fit in," the first source said. Earlier in the year, Tencent had also planned to buy gaming phone maker Black Shark, which it believed had supply chain and inventory experience that could beef up its hardware push and add 1,000 people to the unit.
However, it eventually walked away from that deal due to Tencent's shift in strategy, as well as mounting regulatory scrutiny and an expected lengthy review process, one of the sources who had direct knowledge of the matter said.
The sources said that Tencent had advised most of the unit's staff to seek other opportunities, confirming a Thursday report from Chinese tech news outlet 36Kr.
Tencent declined to comment on the Black Shark deal and whether Beijing's scrutiny had soured the deal. Regarding the status of the XR unit, the company referred to a statement to Reuters on Thursday that said it was making adjustments to some business teams as development plans for hardware had changed.
The company also said on Thursday that it was not disbanding the XR unit.
Tencent shares slipped as much as 2.5% after Reuters' report.
METAVERSE INTEREST
The launch of the XR unit came amid swelling global interest in the metaverse concept of virtual worlds and had marked a rare foray into hardware for Tencent, which is mostly known for software that includes a suite of games and social media applications.
It also entered into a race against Western peers such as Meta Platforms and Microsoft (NASDAQ:MSFT), which are building their own metaverses and have their own virtual reality hardware projects.
One of the sources said that Tencent had dabbled in virtual reality about seven years ago for a short while, and its interest in the area had been revived in 2021 after learning of new breakthroughs in pancake lenses and more powerful displays. Strong sales of Meta's Quest headset was also a driver, the person added.
But last year marked one of the toughest years for Tencent since its founding in 1998, with revenue battered by a regulatory crackdown and headwinds from measures to stop the spread of COVID-19.
Underlining such strains, its founder Pony Ma in December displayed a rare show of frustration at a year-end meeting when he lambasted senior managers for not working hard enough and said the company needed to focus on short video for future growth.
Several tech companies include Meta and Google (NASDAQ:GOOGL) have announced layoffs as they seek to trim costs amid rising fears of a global recession.
Pico, a virtual reality (VR) headset manufacturer owned by TikTok's Chinese developer ByteDance, said on Friday it was laying off a small number of people, after local media reported the start of hundreds of redundancies earlier this week. A source familiar with the matter said 200 staff were affected.
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1 year ago
The price target for Tencent (TCEHY) has been raised to $330.00
By: Best Stocks | January 6, 2023
According to a research, note emailed to investors on Thursday, stock analysts at Mizuho raised Tencent’s (OTCMKTS: TCEHY) price target from $300 to $330.00. The note was included in a research package that was distributed to investors.
TCEHY has been the focus of research in various supplementary papers that have been published. KGI Securities downgraded their recommendation for Tencent from “outperform” to “neutral” in a research note published on October 24. On Friday, October 28, Barclays presented a research report in which they said they had decreased their target price for Tencent from $44.00 to $31.00. This information was included in the report. The share has been assigned four unique ratings, including two hold ratings, two buy recommendations, and one sell rating, all provided by equity research experts. Bloomberg.com’s rating for the stock is “Hold” at the moment, and the website anticipates its price will reach $180.50 shortly.
When trading started on Thursday, the share price of TCEHY was established at $45.99 per share. During its 52-week trading range, the price of Tencent’s stock ranged from a low of $24.75 to a high of $63. The company’s market capitalization is $440.34 billion, the price-to-earnings ratio of the stock is 16.54, and the company has a beta of 0.29. The moving average for the company over the past 50 days is currently sitting at $36.98, and the moving average over the past 200 days is currently sitting at $38.23.
On November 16, Tencent (OTCMKTS: TCEHY) released its most recent quarterly financial report results. The quarterly earnings per share (EPS) for the information technology company came in at $0.37, which was identical to the estimate made by the market as a whole, which was $0.37. The sales for the company for the quarter came in at $19.73 billion, which is significantly lower than the forecast that was made by analysts, which was $20.32 billion. Tencent had a return on equity of 8.93%, and the net margin for the company was 32.16%. According to analysts who follow stocks and shares, Tencent is expected to generate earnings of $1.29 per share during the current fiscal year.
As an investment holding company, Tencent Holdings Limited conducts business in Mainland China and several other countries, where it provides value-added services (VAS) and online advertising. The company can be broken down into the following categories, in descending order: other, fintech and business services, online advertising, and value-added services. In addition to its offerings in the areas of FinTech, cloud computing, and online advertising, it also provides services for online social networks, online games, and online advertising.
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1 year ago
Nio Stock Gets Jolt on Tencent Self-Driving Tech Partnership
By: Schaeffer's Investment Research | November 29, 2022
• Tencent and Nio will partner to create self-driving technology
• The deal will help Nio capitalize on interest surrounding so-called new energy cars
Chinese electric vehicle (EV) giant Nio Inc - ADR (NYSE:NIO) announced earlier that it would partner with tech name Tencent -- also based in China -- to create self-driving and high-definition mapping technology. The partnership will allow Nio to capitalize on the interest surrounding "new energy cars" in Beijing and give Tencent an opportunity to broaden its already wide-reach into China's tech businesses.
NIO is rising after the news, last seen up 3.9% at $10.51. The U.S.-listed equity took most of yesterday's China-based headwinds, actually trading higher at one point before settling with a slight loss. The equity still has plenty of technical obstacles to overcome, however, including its 30-day moving average. Year-to-date, NIO has lost 68%.
When we last checked in on NIO, the stock was surging on upbeat third-quarter delivery numbers. since its mid-November earnings report, however, several analysts have slashed their price targets. The 12-month consensus price target now sits at $20.29, which is still roughly double Nio stock's current perch.
Short-term options traders, meanwhile, have rarely been more call-biased. This is per NIO's Schaeffer's put/call open interest ratio of 0.30, which stands higher than 1% of readings from the past year. Plus, the top six open interest positions on NIO are all puts.
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1 year ago
What the eclipse of Tencent by a liquor company says about Xi’s China
By: Financial Times | October 17, 2022
• Kweichow Moutai has overtaken the tech group in market capitalisation thanks to the whims of one man
What would it say about US innovation and President Joe Biden’s stewardship of the economy if America’s largest beer company, Anheuser-Busch InBev, had a bigger market capitalisation than Apple? Nothing good, probably, and indeed the very thought is a ridiculous one. Apple’s $2.2tn market cap is almost 28 times larger than AB InBev’s $80bn.
But that is exactly what happened recently in China, where Xi Jinping is about to embark on a third term as Communist party leader, military commander-in-chief and state president. Late last month China’s most famous liquor maker, Kweichow Moutai, overtook Tencent as the country’s most valuable company.
How can this be? Tencent is one of the most innovative and successful technology companies in the world’s second-largest economy. It developed the country’s most popular instant messaging and social media app, WeChat, and its WePay online payments platform is second only to Alibaba’s Alipay. Kweichow Moutai, which brews a strong-smelling, 76 to 106-proof grain liquor, sells hangovers.
Politics is how, or at least Chinese Communist party politics as transformed by Xi over the past decade. Xi’s third term will officially begin on Sunday, October 23, almost two years from the day on which an impolitic speech by Alibaba’s founder, Jack Ma, triggered Beijing’s ongoing regulatory crackdown on the technology sector.
Speaking on October 24, 2020, Jack Ma castigated China’s state-owned banking sector for its conservatism and sloth at a financial forum in Shanghai. Ma was correct in his criticism of the banking sector’s traditional neglect of the small and medium-sized enterprises.
“Jack always understood that in markets dominated by large corporations and state-owned enterprises, technology could be the great equaliser for SMEs,” Brian Wong, a former senior Alibaba executive, writes in a forthcoming book on the company. “His real mission was spreading opportunity beyond traditional elite circles?.?.?.?[by] developing a platform for neglected entrepreneurs to thrive, compete and spread prosperity on a far more equitable basis than China had experienced before.”
Unfortunately for his shareholders, Ma was not preaching to the converted. Other forum VIPs included vice-president Wang Qishan, the architect of Xi’s anti-corruption campaign and a former state bank boss, as well as a number of senior financial regulators. Ma appeared to forget that Xi and Wang do not appreciate lesser mortals speaking truth to power. Within a fortnight the initial public offering of Ma’s online finance group, Ant, was cancelled by Chinese regulators.
Ant’s $37bn IPO would have been the world’s largest. Since the speech, the price of Alibaba’s Hong Kong-traded shares has fallen more than 75 per cent. While Tencent’s HK$2.37tn ($301bn) market cap is at least neck-and-neck with Kweichow Moutai’s HK$2.38tn, Alibaba’s — HK$1.56tn — is nowhere close.
* * *
In his book, Wong documents his former boss’s passion — and talent — for disruption. Revealing anecdotes include the time in 2011 that Alibaba broke China’s postal system. He writes that, on its famous November 11 or “Singles’ Day” sales festival that year, “it took [China Post] months to finish delivering all the packages ordered that day”.
When the same thing happened a year later, Ma decided he would have to develop an in-house delivery arm. The result was Cainiao, which means “rookie” in Chinese, and a revolution in China’s logistics industry.
A factory in coastal Guangdong province, Wong writes, can now ship a mobile phone to a customer 1,500 miles inland in three days for just Rmb15 ($2.08). He adds that “a similar package shipped using the UPS three-day service from Boston to Reno, covering roughly the same distance, will cost more than 10 times that amount”.
On October 16, Xi told the party congress that “we will encourage entrepreneurship, move faster to help Chinese companies become world-class outfits and support the development of micro, small and medium-sized enterprises”.
“Been there, was doing just that” Tencent and Alibaba executives might reply. As for Kweichow Moutai, it too might soon discover that its fortunes ultimately hinge on one man’s whims. Since overtaking Tencent as China’s most valuable company, the price of its Shanghai-traded shares has fallen around 8 per cent — partly on rumours that Xi might ban alcohol at party and government
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2 years ago
Tencent shifts focus to majority deals, overseas gaming assets for growth-sources
By: Reuters | October 1, 2022
• Tencent is resetting its M&A strategy to put more focus on buying majority stakes mainly in overseas gaming companies, as the tech giant eyes global expansion to offset slowing growth at home in China, people with
HONG KONG (Reuters) – Tencent is resetting its M&A strategy to put more focus on buying majority stakes mainly in overseas gaming companies, as the tech giant eyes global expansion to offset slowing growth at home in China, people with direct knowledge of the matter said.
Tencent Holding Ltd has for years invested in hundreds of up-and-coming businesses, mainly in the onshore market. It has typically acquired minority stakes and stayed invested as a passive financial investor.
However, it is now aggressively seeking to own majority or even controlling stakes in overseas targets, notably in gaming assets in Europe, the four people with direct knowledge of the matter told Reuters.
The shift comes as the world’s number one gaming firm by revenue is counting on global markets for its future growth, which requires a strong portfolio of chart-topping games, the sources aid.
Tencent’s new strategy indicates how China’s tech titans are looking to emerge from the regulatory shadows after two years of crackdown and uncertainty that weighed on their sales at home and triggered a massive selloff in their stocks.
Apart from the core gaming sector, Tencent is also looking to snap up global assets, in particular in Europe, related to the so-called metaverse, said one of the sources and another source with direct knowledge of the matter.
The people declined to be identified as the information was private.
Tencent told Reuters the company had been investing abroad for a long time – “long before any new regulations” in China. It looks for “innovative companies with talented management teams” and gives them room to grow independently, the company added, without elaborating.
Tencent’s pursuit for bigger stakes in gaming firms comes as other tech giants such as Microsoft, Sony and Amazon are snapping up gaming assets and related intellectual properties, said three of the sources.
Tencent’s chief strategy officer, James Mitchell, said on a post-earnings call in August the company would remain active in acquiring new game studios overseas.
“In terms of the game business, our strategy is … to focus on developing our capabilities especially in the international market,” he said. “We will continue to be very active in terms of acquiring new game studios outside China.”
Pursuit of bigger stakes
Tencent’s growing focus on overseas assets and markets is in sharp contrast to its much slower dealmaking pace at home since the regulatory clampdowns intensified, and the divestment of a clutch of domestic portfolio companies.
From 2015 to 2020, the owner of China’s number one messaging app WeChat 150 investments at home totalling $75 billion, compared to 102 deals worth $33 billion in overseas markets, according to Refinitiv data.
Tencent in August reported its first ever quarterly top-line fall, partially hurt by a lack of game approvals in China and regulations that limit playing time. Revenue from online games decreased both at home and abroad by 1%.
Its Hong Kong-listed shares have sunk some 60% in the last two years.
Against that backdrop, Tencent has barely made investments in China this year versus 27 deals worth $3 billion offshore, Refinitiv data show. It has been reducing its portfolio partly to placate regulators and also to book some hefty profits, sources have told Reuters.
“We believe Tencent will continue to make reasonable investments to acquire quality gaming content and talents and deepen partnerships with top-tier studios worldwide in order to step up its investments and presence in overseas markets,” said Citi analysts in a report in early September.
Tencent’s pursuit of bigger stakes in its existing gaming portfolio or new targets would give the company a bigger say in such firms’ businesses and also help it secure the intellectual property rights of popular games, said the four sources.
Also, with Beijing strictly restricting game approvals at home and still suspending approvals for games of foreign IPs, Tencent is forced to move towards gaining control of foreign game companies and their IPs, said the four sources.
Tencent in September raised its stake in Ubisoft in a deal that made the Chinese firm the single biggest shareholder of the top French games developer, with a stake of 11% which can be further increased to as much as 17%.
Regional hub
The Ubisoft deal comes just after deep-pocketed Tencent in June acquired Copenhagen-based Sybo Games, the developer of hit mobile game Subway Surfer, and in August took a 16.25% stake in Japan’s “Elden Ring” developer FromSoftware.
Last year, Tencent said it would take over British videogame developer Sumo in a $1.3 billion deal – one of its largest foreign transactions since the regulatory crackdown in late 2020.
In Europe, except for its purchase of majority stake in “Clash of Clans” mobile game maker Supercell for $8.6 billion in 2016, Tencent has for years mostly cut minority deals including its purchase of 9% of British gaming firm Frontier Developments.
Elsewhere, Tencent also seeks to increase its investment in and make deeper forays into Southeast Asia as it sees the region – home to 650 million people – as having potential to replicate the success of China’s internet boom, said two of the sources.
China’s largest social network firm already has a regional hub for Southeast Asia in Singapore that houses its international game publishing business.
Since last year, the company has repeatedly emphasized that it is aiming to have half of its gaming revenue coming from outside China, from about 25% now. In doing so, it in December launched a new publishing brand called Level Infinite in Singapore.
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2 years ago
Tencent Divestment Concerns Add to China Pressure
By: Bloomberg | September 2, 2022
In a world awash in technology stocks for sale, the last thing bulls want to see is more big sellers hitting the market. In China, that appears to be just what’s happening.
Investors are fretting that Tencent Holdings Ltd. will add to pressure on the market if it moves ahead with a reported plan to offload 100 billion yuan ($14.5 billion) from its equity portfolio. While the company denied the report, that was little comfort to stockholders, who pushed down the share prices of Tencent investees such as Pinduoduo Inc. and KE Holdings Inc.
A divestment would follow similar moves under consideration by Baidu Inc. and Alibaba Group Holding Ltd. as the internet giants seek to assuage regulators concerned about their sway over the industry. And it would just deepen the gloom around Chinese tech stocks still reeling from Beijing’s regulatory clampdown. The Nasdaq Golden Dragon Index of US-listed Chinese stocks has plunged 64% from its 2021 record.
“The current market environment is not favorable and may substantially exacerbate the negative impacts on the share prices of the targeted companies being off-loaded,” said Redmond Wong, Saxo Capital Markets strategist.
Investors are now paying attention to what is next. Alibaba -- which arguably faced the worst of the regulatory crackdown -- holds a stake in at least six US-listed stocks, including XPeng Inc. and Weibo Corp., according to exchange filings. Baidu owns a controlling stake in iQiyi Inc., while e-commerce giant JD.com Inc. is a shareholder of its peer Vipshop Holdings Ltd., Bloomberg data shows.
China’s tech titans have plenty of incentive to pare their stakes in listed companies. Besides appeasing regulators, reducing their holdings also slims balance sheets and gives firms the ability to invest those funds into more profitable operations...
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2 years ago
Marketmind: Tencent’s Q2 results take center stage in Asia
By: Reuters | August 16, 2022
• A look at the day ahead in Asian markets from Jamie McGeever
Earnings from China’s Tencent, an interest rate decision from New Zealand, and a clutch of Japanese economic indicators will give Asian markets a local steer on Wednesday, following another solid rise on Wall Street and notable decline in oil prices.
Tencent’s second-quarter results come a day after Reuters exclusively reported that the tech giant plans to sell all or a bulk of its $24 billion stake in food delivery firm Meituan.
This would placate domestic regulators but also bring a timely cash injection – Tencent’s second-quarter profit is forecast to slide 27%, per analyst estimates on Refinitiv, thanks to a slowing economy and tightened video-game rule.
Tencent’s shares edged up 0.9% on Tuesday, while Meituan’s slumped 9%, their biggest fall in five months.
On the macro front, the Reserve Bank of New Zealand is expected to raise its cash rate by 50 basis points for the fourth meeting in a row. All 23 economists in a Reuters poll forecast the rise to 3.00%, which would mark the most aggressive tightening since 1999.
RBNZ rate decision: https://tmsnrt.rs/3ApCqVH
Meanwhile, figures from Japan are expected to show a recovery in machine orders and a narrowing trade deficit. The Tankan manufacturing and services indexes for August will also be released.
Tuesday marked another 3% fall in oil prices and solid rise on Wall Street. Brent crude is now lower than it was before Russia’s Feb. 24 invasion of Ukraine, and the S&P 500 has rebounded almost 20% from its June low.
Later on Wednesday investors also have a clutch of U.S. and European macro releases to digest, including: UK inflation, euro zone GDP and employment, and U.S. retail sales.
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2 years ago
Here's Why Investors Are Avoiding Tencent Stock
By: Motley Fool | August 13, 2022
• Tencent is facing multiple headwinds in the near term.
Once a bedrock of stability and growth, Tencent Holdings Limited (TCEHY -1.52%) stock has lost its appeal among investors. From their peak in early 2021, Tencent's shares have dropped by more than 55%. The stock lost over 30% of its value this year alone.
Confused (and frustrated) investors -- especially foreign investors -- want to know what caused the share price to plummet. Though we cannot pinpoint the exact reason, we can certainly make some educated guesses. Here are some of mine.
Tencent's recent financial performance has been disappointing
It is not without reason that Tencent has been a favorite among investors for many years. From its IPO in 2004 to 2021, the company grew its top and bottom lines by a compound annual growth rate (CAGR) of 44%. This impressive performance generated enormous returns for early investors who held on to the stock.
Lately, Tencent seems to have lost its Midas touch. In the fourth quarter of 2021, revenue growth slowed to 8% year over year while profit fell 25% on a non-IFRS basis. The tech specialist followed that with another weak performance in the first quarter of 2022: Revenue came in flat while profit plunged 24%.
Tencent's recent performance was affected by the slowdown in gaming revenue growth and the decline in advertising income. The latter was severely impacted due to lower advertising income from online education and internet service industries amid the Chinese government crackdown. Moreover, the online advertising industry's regulatory changes further affected advertising revenue.
To address these challenges, Chairman and CEO Ma Huateng said that Tencent "has implemented cost control initiatives and rationalized certain non-core businesses, which would enable us to achieve a more optimized cost structure going forward."
I like that the management team is addressing its challenges head-on. Yet its decision also signaled that this downturn could last a while. At best, Tencent's good old days of high growth rates might take some time to resume. At worst, they might never...
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2 years ago
Exclusive-Tencent seeks bigger stake in ‘Assassin’s Creed’ maker Ubisoft -sources
By: Reuters | August 4, 2022
• Tencent Holdings Ltd plans to raise its stake in French video game group Ubisoft Entertainment SA as the Chinese gaming giant pivots to the global gaming market, four sources with direct knowledge of the matter
HONG KONG (Reuters) -Tencent Holdings Ltd plans to raise its stake in French video game group Ubisoft Entertainment SA as the Chinese gaming giant pivots to the global gaming market, four sources with direct knowledge of the matter told Reuters.
China’s largest social network and gaming firm, which bought a 5% stake in Ubisoft in 2018, has reached out to the French firm’s founding Guillemot family and expressed interest in increasing its stake in the firm, the sources said.
It is not clear how much more Tencent wants to own in Ubisoft, valued at $5.3 billion, but Tencent aims to become the single largest shareholder of the French company with an additional stake purchase, two of the sources said, speaking on condition of anonymity.
Tencent is hoping to buy a part of the additional stake in Ubisoft, the maker of the blockbuster “Assassin’s Creed” video game franchise, from the Guillemot family, which owns 15% of the firm, three of the sources said.
Tencent could offer up to 100 euros ($101.84) per share to acquire the additional stake, two of the sources with knowledge of the internal discussions, said. It paid 66 euros per share for the 5% stake in 2018.
Details of the deal are not yet finalised and are subject to change, the sources said.
Ubisoft shares surged 16% after the Reuters report in their biggest daily rise since 2010.
Shares in Guillemot Corp SA, the holding company in which the Guillemot family owns the majority shareholding, were trading up more than 7%.
Tencent will also seek to acquire shares from public shareholders of Ubisoft, two of the sources said, in a bid to boost its ownership and become the single-largest shareholder.
About 80% of the French firm’s shares are owned by public shareholders, according to its latest annual report.
All the sources declined to be named as they are not authorised to speak to the media.
Tencent and Ubisoft declined to comment.
Representatives of the Guillemot family could not be immediately reached for comment.
The planned stake purchase, Tencent’s latest major foreign deal since a regulatory crackdown in late 2020, will help it offset some of the pressures in the domestic gaming market. China’s video games market, the world’s largest, has become fiercely competitive.
“Tencent is very determined to nail down the deal as Ubisoft is such an important strategic asset for Tencent,” one of the people said.
At the top end of 100 euros per share, Tencent’s offer will be a premium of 127% to the stock’s 44 euros average price over the past three months, and is close to its historical price ceiling at 108 euros in 2018.
Tencent has submitted to the Guillemot family a term sheet – a non-binding offer describing the basic terms and conditions of an investment – with a price “way above” the company’s current price to ward off potential competition, one of the sources said.
The aggressive offer comes as global gaming power houses have been rushing to snap up quality independent game makers in recent years, which are in scarcity, two of the sources said.
Tencent’s senior executives flew to France in May to meet the Guillemot family about the purchase, two of the people said.
Domestic pressures
China’s gaming regulator has not granted any new game licences to Tencent at home since June last year, before it froze gaming approvals for nearly nine months. Since it resumed approvals in April this year, none of the past four batches included the company.
In May, Tencent reported that its domestic game revenue dropped 1% in the first quarter while international game revenue rose 4%.
Tencent, which has stakes in U.S. video game developers Epic Games and Riot Games, said in June it would release its flagship mobile game “Honor of Kings” globally by the end of the year.
In 2016, it bought a majority stake in “Clash of Clans” mobile game maker Supercell for roughly $8.6 billion, one of the world’s biggest ever gaming deals.
It also owns 9% of UK video gaming firm Frontier Developments and said last year it would buy another British developer Sumo in a $1.3 billion deal.
Ubisoft, whose titles also include “Prince of Persia” and “Rainbow Six”, in May forecast lower operating profit for 2022-23 after the company reported operating income for 2021-22 that missed estimates.
($1 = 0.9819 euros)
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2 years ago
Tencent to close Steam-like mobile game portal as market prospects dim under tight regulation
By: South China Morning Post | July 6, 2022
The mobile version of WeGame, the video game portal that was Tencent Holdings' answer to Steam, will cease operations in two months, in a fresh sign that business prospects in the world's largest gaming market have become bleaker under Beijing's tightened scrutiny.
The WeGame app, as well as its in-app version on Tencent's super app WeChat, will stop its service starting from September 8 because of "changes in business development strategy", the app's operation team said in a notice issued on Tuesday.
WeGame stopped accepting new user registrations on Tuesday, and people will no longer be able to download the app from July 15, according to the notice.
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The decision comes a month after Tencent pulled the plug on its Twitch-like game streaming site Penguin Esports, as the world's largest video gaming company by revenue moves to streamline operations in a slowing and increasingly competitive market.
Tencent did not immediately respond to a request for comment on Wednesday.
Launched in 2017 on mobile and PC as a rebranded version of Tencent Game Platform, the company's original game distribution site, WeGame was originally designed as a game portal that hosts video games and other related content, with Steam - the world's largest video game platform - being its main rival.
However, WeGame has largely failed to live up to its ambitions, now functioning more often as a place for gamers to look up records of their scores and performances in Tencent-distributed games, such as League of Legends and its spin-off auto battler game Teamflight Tactics.
Some of the app's functions will be transferred to the PC version of WeGame, which will remain operational, the team said.
The WeGame app has an "awkward positioning" in the market, said Zhang Yi, chief executive at iiMedia Research.
"Tencent's game products belong to various studios, each backed by their own personnel, budget, and development and operational resources", which made WeGame "a bit redundant", he said.
Regulatory pressure continues to weigh on Tencent and China's video gaming industry, even after the government ended its eight-month freeze on video game licensing in April. The pace of approvals has significantly slowed from a year ago, while Tencent and its closest domestic rival NetEase have yet to gain a single new licence this year.
Chinese antitrust regulators last year blocked Tencent's plan to merge Douyu and Huya, two of China's largest game-streaming websites, both controlled by Tencent.
Also last year, Tencent saw its slowest annual top-line growth since the company went public in 2004. The Shenzhen-based company was in the process of slashing thousands of jobs, the Post reported in March.
Tencent has already dialled back on some of its non-gaming businesses, joining other Big Tech companies that have been going through restructuring to reduce costs.
Last week, Vue Vlog, a live video-blogging app bought by Tencent in 2014, announced it would cease operations in September. Tencent also said last month it would terminate its news aggregator app Kuai Bao, citing business adjustments.
"In the larger context of Tencent trying to reduce costs and increase efficiency, products that neither make money nor have any strategic prospects need to be cut off," said iiMedia's Zhang. "It will not be surprising to see more Tencent products being shut down in the future."
Some Chinese gamers said WeGame's demise was overdue.
"I'm not surprised at all about the closure," said user Qiaoyiqiao, commenting in the online video game community Xiaoheihe. "Several of Tencent's high-traffic games have their own mobile terminals. Other small games in WeGame have no attraction to players at all."
"I kind of hope the PC version will shut down as well," said another user on Weibo.
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2 years ago
Tencent's Biggest Shareholder Just Made a Huge Move to Create Value
By: Motley Fool | July 3, 2022
For years, Tencent's (TCEHY -0.18%) largest shareholder, early investor Naspers (NPSNY -2.03%), along with its cross-held holding company subsidiary Prosus (PROSY -0.65%), has traded at a discount to its Tencent stake. Despite Naspers/Prosus' best efforts at financial engineering and diversifying its business into food delivery, digital payments, education technology, and e-commerce in emerging markets, the discount has continued to widen.
Just how wide? Based on its recent net asset value, incorporating both prevailing market prices and analyst estimates for private assets, Prosus trades at just over half of its net asset value (NAV), while Naspers is even cheaper, at around 45% of NAV.
In its recent earnings release last week, however, Naspers/Prosus announced its boldest move to close the discount yet. While previous moves have failed, this new strategy is bigger, bolder, and could tangibly increase intrinsic value per share in a significant way.
An open-ended repurchase program funded by Tencent sales
Even though Naspers and Prosus have attempted to diversify their assets, and Tencent's stock has declined over the past year, Tencent still accounts for 77% of Naspers/Prosus' NAV. Meanwhile, most of Naspers/Prosus' other businesses are growing strongly but don't produce much cash flow. While the company has lots of liquidity, it also has just as much debt as cash and would probably like the ability to make an acquisition if an opportunity arises in this adverse environment.
That leaves Naspers/Prosus with no other option to raise cash in order to buy back stock other than selling more Tencent. While the company initially said it wouldn't sell any more Tencent for three years after selling some of its stake in early 2021, management changed its tune, surprising the market last week.
The new plan is for an open-ended sale of Tencent shares, along with a simultaneous repurchase of Naspers/Prosus shares. According to management, it will buy Naspers and Prosus shares in equal proportion to their ownership of total assets, with Naspers having 42% of the economic interest in Prosus' assets and Prosus shareholders outside of Naspers owning the remaining 58%. The program will occur as long as there is a "significant" discount, although management didn't give specifics on what that meant.
While liquidating a very attractive, cash-flowing company like Tencent seems like a sacrifice, the discount is so large that Naspers and Prosus shareholders will actually see its ownership of Tencent increase on a per-share basis.
For instance, management gave an example in which it sold $10 billion of Tencent and repurchased $10 billion of Prosus shares. That would lower Prosus' net asset value by 5.9%, but Prosus' share count would decrease by 13.5%. The result? An increase in NAV per share of 9%. A $20 billion sale and repurchase at the same level would increase NAV per share by 20%, and a $30 billion sale and repurchase would increase NAV per share by 38%.
How this could be more effective than past moves
No doubt, Naspers and Prosus have made financial engineering moves in an attempt to close the discount before. However, this one seems like it has a much better chance of working.
In 2019, Naspers created Prosus, a separate holding company for its non-South-African assets. Naspers, a South African company, had become so large on the Johannesburg Stock Exchange that management believed its size was limiting the amount asset managers could purchase. The thinking was that by creating Prosus and spinning off Prosus shares to Naspers shareholders on the Euronext Exchange, Naspers' market cap would shrink on the JSE, even though its assets would not go down. They would merely be transferred out of South Africa.
However, that didn't work, likely because it created more complications with the two-company structure. In 2021, management then executed a share swap between Naspers and Prosus in an attempt to further shrink Naspers' weighting. However, that added even more complications, and the discount widened again.
Meanwhile, Naspers has sold Tencent shares in the past, both in 2018 and then in 2021. However, the cash from those proceeds, while going partly to a buyback, mostly went to buying more companies across classifieds, digital payments, e-commerce, and other ventures. Those assets have declined in value over the past year along with Tencent as the tech market has crashed, so the NAV per share didn't really improve.
However, this new change could work much better. The prior creation of Prosus was more of a financial engineering gimmick meant to decrease Naspers' weighting on an index. Meanwhile, investors aren't giving the company any credit for its diversification into other areas, still regarding the stock as a play on Tencent.
This move, however, is large and open-ended and seems to be a capitulation on management's part that it must do something different to be regarded as anything other than a Tencent proxy. Meanwhile, a large-scale repurchase will make a tangible difference in value per share immediately. Naspers' management has tried to do everything in its power to hang on to as much Tencent as possible for the long term, but investors have shunned that strategy because it hasn't addressed the discount. However, management now seems to be capitulating, finally declaring the huge and widening discount "unacceptable."
An interesting, idiosyncratic play in a tough market
I've been wrong in thinking Naspers/Prosus' past moves would help close the discount. However, this new strategy seems a bit different. With China now cutting interest rates and perhaps ending its regulatory crackdown on its tech giants, it's also possible Tencent may begin rising in value before U.S. indexes do. When you add this repurchase of Naspers/Prosus at half of its intrinsic value, it's an intriguing idiosyncratic option in an otherwise tough market.
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2 years ago
Tencent's WeChat debuts in 618 shopping festival with big bet on live-streaming e-commerce despite slowing economy
By: South China Morning | June 18, 2022
• The June 18 shopping festival, China's second-largest online shopping extravaganza after Singles' Day in November, has become the latest arena of e-commerce rivalry between established players, such as Alibaba Group Holding, JD.com, and new contender, Tencent Holdings' WeChat, as mainland consumers have become reluctant to loosen their purse strings in a slowing economy.
For the first time, WeChat has entered the 618 battlefield by offering merchants various incentives to live-stream on its video service Channels. The app has promised to direct more traffic to sellers who have achieved a certain sales level or posted high-quality short videos. It also said it would feature well-performing "showrooms" on the recommendation page.
While Tencent's model of merging e-commerce with live-streaming is hardly new - Kuaishou Technology and TikTok's Chinese sibling Douyin both started earlier - WeChat's new efforts to woo online shoppers reflect an increasingly competitive business environment for China's Big Tech companies, which are looking for new growth areas amid economic challenges.
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The ubiquitous presence of WeChat, which has 1.29 billion monthly active users, most of them located on the mainland, has offered some merchants the hope of reaching untapped consumers and connecting directly with them through WeChat's social features.
One brand trying to leverage WeChat's vast user base is Miniso, China's largest variety lifestyle-goods retailer, which debuted two product lines - a new collaboration with Walt Disney Studios' Pixar and a new line of aromatherapy products - through live-streaming sessions on Channels during the 618 festival, according to Wei Xiaoya, digital marketing director of the Guangzhou-based retailer...
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China's Tencent revises pay rise policy in memo, amid cost savings pressures
By: Reuters | June 1, 2022
HONG KONG (Reuters) - China's Tencent Holdings has told staff it will no longer guarantee them a pay raise upon promotion, according to an internal letter seen by Reuters, as it reviews its salary policy amid a wider cost-cutting drive.
The Chinese social media and gaming giant told its employees of the policy change on Tuesday, saying the decision was taken as part of a yearly review in consideration of the "company's operation plan and the external environment."
But it said the company would still conduct an annual salary review to consider an individual's contribution and performance.
Tencent, which declined to comment on Wednesday, told staff in 2020 it would no longer guarantee an annual salary rise.
Its latest policy change reflects the changing circumstances of China's technology giants, once among the fastest growing Chinese firms and sought after employers but now hit hard by a bruising regulatory crackdown and a slowing economy.
Tencent, China's most valuable company, reported quarterly earnings last month showing profit halved from a year earlier and revenues stagnated, its worst performance since it went public in 2004.
Founder and Chief Executive Pony Ma told analysts the company had implemented cost control measures and scaled back non-core businesses in the first quarter. He said it was looking to "achieve a more optimised cost structure going forward".
It has shut its Penguin Esports unit. Reuters reported earlier this year that Tencent and peer Alibaba Group planned to make numerous job cuts.
The latest Tencent salary policy change, first reported by local media on Wednesday, was one of the most discussed topics on the Maimai career portal, China's equivalent of Linkedin.
"Quality candidates will now weigh the stability of a Tencent job," said one user on Maimai, who used a pseudonym and said he was a Tencent employee.
Ma caused a stir on Chinese social media recently after he reposted an article on China's economy, breaking his usual silence on an increasingly sensitive topic.
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2 years ago
Tencent profit halves, revenue flat, as ad sales slump
By: Reuters | May 18, 2022
HONG KONG (Reuters) -China's Tencent posted a quarterly profit that had halved from a year ago and recorded no revenue growth, its worst performance since it went public, warning that advertisers in consumer, eCommerce and travel businesses had slashed spending.
COVID-19 lockdowns in China have hurt advertiser sentiment, while Tencent's ad business has also taken a knock from competition from rivals, including TikTok owner ByteDance.
Tencent, operator of the WeChat messaging platform and the world's largest video game company, said ad sales slumped 18% in the first quarter ended March 31, following a 13% drop in the October-December period.
The company has lost more than half its market value since its peak in February last year after Beijing launched a regulatory crackdown to rein in the influence of large internet firms. It still remains the country's most valuable company.
For an interactive graphic, click here: https://tmsnrt.rs/3sHCX12
Beijing, which froze new game licences for 8 months, resumed issuing licenses in April but the latest batch of new licenses did not include games from Tencent, which makes much of its money by developing games such as 'Honour of Kings' and 'Call of Duty Mobile'. China is yet to issue a new batch of game licenses this month.
Charlie Chai, vice head of research at 86Research, said Tencent's sensitivity to the macroeconomy was rising, particularly for its ad and payments businesses.
The Shenzhen-based company said on Wednesday that user spending on games was normalising after a surge during the pandemic, while a COVID resurgence in China has also dampened payment activities.
"I think investors will closely watch Tencent, along with Alibaba (NYSE:BABA), as bellweather stocks for the New Economy," Chai said, "[Future direction] all depends on how active and effective the government stimulus will be."
Following its unprecedented regulatory crackdown, which began in late 2020 and slammed Chinese tech companies, Beijing soothed tech executives on Tuesday, saying the government supported the development of the sector and public listings - a sign that restrictions on the sector were easing.
Tencent's domestic game revenue dropped 1% in the first quarter while its international game revenue saw a 4% rise. With Chinese regulators imposing draconian measures to limit minors from playing video games and curbing aggressive monetization features, Tencent has turned to overseas markets for growth.
Revenue growth in its fintech and business services segment slowed to 10% in the first quarter, from 47% a year earlier.
Total revenue was 135.5 billion yuan ($20.08 billion) in the quarter ended March, versus 135.3 billion yuan in the same quarter last year, and below an average estimate of 141 billion yuan of 16 analysts, according to Refinitiv.
Shawn Yang, Shenzhen-based managing director of Blue Lotus Capital Advisors, said the 51% plunge in quarterly profit was particularly concerning.
"I estimated a 17% or 18% decrease because I had learned that they had executed many cost-cutting measures," Yang said. "I couldn't guess that its profit has gotten this bad."
($1 = 6.7488 Chinese yuan renminbi)
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2 years ago
Alibaba, Tencent Look Cheap But Should You Buy China's Mega Caps?
By: Investing.com | March 24, 2022
After taking multiple blows during the past year, Chinese mega cap stocks are beginning to show signs of life again. Last week, the Asian country's top policymaker revealed intentions to stabilize and support its beaten-down capital markets. The announcement triggered an unprecedented daily 33% jump for the NASDAQ Golden Dragon China index of companies listed in the US, its largest advance on record.
The e-commerce giant Alibaba (NYSE:BABA) has rallied an impressive 52.7% since. It closed Wednesday at $117.24.
BABA Weekly Chart
Similarly, gaming and social media behemoth Tencent Holdings (OTC:TCEHY) gained 21.4% during the same period. It closed Wednesday at $47.880.
TCEHY Weekly Chart
In a series of statements, China's top economic officials reassured investors that a sweeping crackdown on internet companies was nearing its end. Furthermore, the country's banking regulator said it would support insurance companies to increase investment in stock markets, which have been in the grip of intense selling pressure.
However, this government-engineered reversal can't remove the many macroeconomic headwinds that remain in play. One of the biggest is the Russia-Ukraine conflict—in which China, seemingly allied with Russia, appears to be on the wrong side.
China's alleged backing of Moscow in its war with Ukraine is fueling speculations that the world's second largest economy and its companies could face US sanctions if the conflict escalates.
Many investors have begun asking whether Chinese companies are still worth the risk after meeting unprecedented losses on their holdings during the past year.
Rising Geopolitical and Macro Risks
JPMorgan Chase last week downgraded 28 Chinese internet stocks, including Alibaba and Tencent Holdings, calling them "uninvestable" over the next 6 to 12 months due to rising geopolitical and macro risks. Any decision by the US to impose new sanctions on China or individual Chinese firms doing business with Russia is the biggest concern for stock investors.
Another uncertainty that will continue to weigh on these stocks is the push by the SEC to get access to financial data on foreign companies listed on the US exchanges. According to the Wall Street Journal, US regulators could not inspect working papers for five US-listed Chinese companies on Thursday. Among those names are the biotechnology group BeiGene (NASDAQ:BGNE) and Yum China Holdings (NYSE:YUMC), the operator of KFC in China.
The 2020 Holding Foreign Companies Accountable Act enacts a trading prohibition for companies that fail to provide audit papers for three straight years.
Rising Domestic Risks
Even if investors ignore these macro risks, the growth story also doesn't seem too compelling. China's economy is slowing and it's late in the pandemic recovery cycle, with its cities and towns continuing to face lockdowns.
During the last year, China also pursued intense regulatory scrutiny of its technology companies as part of its push to break their monopolies and protect consumer data.
The Asian country has sought to introduce regulation in areas ranging from anti-trust to data protection. After a year of crackdowns, there are signs that these companies are now struggling to grow.
Alibaba told investors last month, during its earnings report, that it will now prioritize user retention over acquisition—a significant shift for a company that became the biggest technology company in China by pursuing relentless growth. Its latest quarterly earnings reported the slowest revenue growth since it went public.
Alibaba's US-listed shares got a boost from its increased share buyback plan, announced this week. Nevertheless, the company lost about half of its value in the past year.
Tencent, which reported its latest quarterly earnings yesterday, showed its slowest pace of quarterly growth on record, hurt by weak online advertising and revenue from gaming.
Tencent has lost more than $470 billion from its peak in 2021, even though it has largely escaped Beijing's direct scrutiny.
Bottom Line
Investing in Chinese stocks remains a risky bet, given the multiple hazards that investors in Chinese companies face. While there are signs that China is willing to ease pressure on its tech giants, it isn't easy to imagine how these companies will manage to show rapid expansions that warrant premium valuations they once enjoyed.
Investors, therefore, are better off staying on the sidelines, in our view.
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2 years ago
Tencent posts slowest-ever sales rise; regulation impact set to ease
By: Brenda Goh | March 23, 2022
SHANGHAI (Reuters) -Revenue at Chinese social media and gaming giant Tencent grew just 8% in the fourth quarter, the slowest pace since it went public in 2004, reflecting regulatory scrutiny that has hurt both its gaming business and advertising sales.
China has frozen game approvals since August last year and curtailed gaming time for under-18s, part of Beijing's move to strengthen control over its society and industries including technology, after years of unbridled growth.
This has also led to a slowdown in advertising as businesses have cut spending.
Tencent Holdings (OTC:TCEHY), which gets much of its revenue from gaming and develops games such as 'Honour of Kings' and 'Call of Duty Mobile', said domestic gaming sales grew 1% in the quarter ended Dec. 31.
The restrictions on minors were effective as the total time spent by minors on its games sank 88%, Tencent said, adding that the impact of this factor on revenue growth would ease later in the year.
"As we move into the latter half of 2022 it should cease to impact the revenue growth rate," Chief Strategy Officer James Mitchell told reporters on a call on Wednesday, referring to the minor-protection measures.
Tencent President Martin Lau said regulators were still supportive of the gaming industry, adding that the company had a ready pipeline of games for when approvals resumed.
The company, which also posted its slowest ever annual revenue growth at 16%, said revenue in its online advertising business fell 13% in the fourth quarter.
It expects its ad business to resume growth in late 2022 after companies adjust to regulatory requirements.
Total revenue rose to 144.2 billion yuan ($22.63 billion) in the quarter, below an average of 147.6 billion yuan expected by 17 analysts, Refinitiv data showed.
Beijing has also issued rules to regulate financial holding companies, directing Tencent peer Alibaba (NYSE:BABA)'s affiliate Ant to turn itself into a financial holding company with capital restrictions.
Lau, who had previously said that creating a financial holding company would not impact its business, repeated his stance on Wednesday and said Tencent was proactively discussing whether it qualified for such a licence.
STAFF NUMBERS
"Going forward we feel that we'll continue to see new regulations coming in but the incremental ones will be less than the bulk of regulations that happened in the first couple of years," Lau said.
He said he expects growth in staff numbers this year to be much slower than in previous years as companies pay more attention to efficiency and costs.
Reuters has reported that Tencent CEO Pony Ma told employees at the end of 2021 that the company should prepare itself for a "winter", and that it and Alibaba were preparing to cut tens of thousands of jobs combined in one of their biggest rounds of layoffs.
Tencent's stock has lost more than a third of its value in the past 12 months, while Alibaba's has more than halved.
Still, their shares have rallied in recent days after Chinese Vice Premier Liu He said last week that Beijing would roll out support for the economy and keep markets stable.
Tencent said on Wednesday its adjusted profit for the December quarter fell by a fourth to 24.9 billion yuan as costs rose.
($1 = 6.3729 Chinese yuan renminbi)
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