Revenue decline forecast for the first quarter

People walk past a Tencent sign at the company’s headquarters in Shenzhen, Guangdong province, China August 7, 2020.

David Kirton | Reuters

Tencent could post its first year-over-year revenue decline when it reports second-quarter results on Wednesday, analysts say, as a Covid-induced slowdown in China’s economy and lingering challenges in the domestic market of the game could prove to be strong headwinds for the company.

The Chinese gaming and social media giant is expected to post revenue of 132.2 billion yuan ($19.5 billion) for the June quarter, down more than 4% year-on-year the other, according to the consensus forecast from Refinitiv. Net profit is expected to drop nearly 30% to 23.8 billion yuan.

Tencent, which runs China’s biggest messaging app WeChat, derives much of its revenue from games and advertising, two areas that are expected to have been hit in the second quarter.

“We are factoring in more cautious assumptions for online gaming and advertising revenue in Q2 due to global macro headwinds and the onset of the pandemic. We expect the headwinds to lead to a decline in foreign player spending,” Jefferies analysts said in a note released last month.

In the April-June quarter, China saw a resurgence of Covid-19 that led to lockdowns in major cities, including the financial metropolis of Shanghai, as authorities pursued the country’s “Zero Covid” policy.

China’s economy grew just 0.4% in the second quarter, below analysts’ expectations. Macro headwinds are expected to lead to slower consumer spending and reduced advertising, two areas Tencent is relying on.

For the April-June quarter, e-commerce giant Alibaba reported flat revenue growth for the first time on weak consumer spending.

Jefferies expects Tencent’s online ad revenue to decline 29% year-on-year in the second quarter to 16.3 billion yuan. This is a steeper drop than what was reported in the first quarter.

“We expect the softness to come from the onset of the pandemic and uncertainties in the macro environment, as well as the elevated base in some industry categories (including Education and Gaming),” he said. said Jefferies.

Headwinds to the Game

Gaming revenue, which accounts for about a third of Tencent’s total sales, will be the focus of investors’ concerns.

The gaming sector in China continues to face challenges. Last year, Chinese regulators said children under 18 would only be allowed to play online games for up to three hours a week and only at specific times.

While Tencent has said in the past that miners only make up a tiny portion of its revenue, some of the effects are visible.

Regulators also froze approvals for new games in China starting last July and only started greenlighting new titles again in April. In China, games must be approved by regulators to be monetized. China exercises heavy censorship over game content.

China Renaissance analysts said in a note released last month that Tencent only launched three mobile games in the second quarter, so there will be a “limited contribution” to revenue from new titles. Analysts expect online gaming revenue to decline in the second quarter, with domestic gaming revenue down 3% and international gaming revenue up 8% year-on-year.

Tencent and rival NetEase turned to international games expansion as the domestic market slowed, acquiring developers or opening new studios.

Jefferies analysts are optimistic about the future potential of Tencent’s overseas campaign.

“Overseas, Tencent has a strong pipeline of around 30 titles slated for release in the next few years,” they said. “In addition to mobile games, Tencent also has console games in the pipeline. It is pursuing multi-pronged strategies in overseas expansion, such as setting up local operating teams, self -development as well as publishing.”

Sale of Meituan, focus on the cloud

Investors will keep an eye on a few other areas of Tencent’s business.

On Tuesday, Reuters reported that Tencent planned to divest most of its $24 billion stake in food delivery giant Meituan. A source with knowledge of the matter told CNBC that Tencent currently has no plans to sell its stake. Investors hope to hear from Tencent executives about its plans in this area.

Tencent’s fintech and cloud businesses are also important areas for the company. Tencent operates one of China’s largest mobile payment platforms called WeChat Pay. China Renaissance said it expects revenue growth of just 2% year-over-year for the fintech due to the resurgence of Covid.

Cloud business growth could also be hampered by “project delays and weak offline business” due to the pandemic, Jefferies said.

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