Tencent Posts First Ever Revenue Slump as China Remains Unsettled

Tencent Holdings’ (OTCMKTS: TCEHY) share price increased by 0.23% in pre-market trading as it recorded its first-ever quarterly year-over-year drop in sales. This is partly due to stricter gaming regulations, persistent COVID-19 lockdowns, and a deepening downturn in China — the world’s second-largest economy. The company also reported it is letting staff go for the first time since 2014, as mass lay-offs in the global tech sector finally hit China’s most valuable company.

What were the key points from Tencent’s earnings report?

The company recorded total quarterly revenue of RMB 134 billion ($20 billion), a 3% decrease from Q2 2021. Half-year revenues fell by 1% to RMB 269.5 billion. The main contributors to this decline were the 18% drop in Online Advertising, the 17% drop in Social and Others Advertising, and the 25% decrease in Media Advertising segments. 

This was due to weakness in the internet services, education, and finance sectors, which are big advertisers. Tencent saw minimal growth in its International Games, Domestic Games, Fintech, and Business Services segments, which barely offset the declines in advertising.

Tencent’s free cash flow was up 30% year-over-year (YoY) to RMB 22.5 billion, partly due to a 57% decrease in capital expenditures to RMB 3.0 billion. Tencent recorded total cash of RMB 315.9 billion ($47.1 billion) at the end of the quarter. This massive stockpile will keep the company afloat and allow it to continue making investments should revenues continue to fall.

The company’s profit attributable to equity holders was RMB 42 billion ($6.3 billion), representing a YoY decrease of 53%. Tencent’s net profit margin of 16% was significantly lower than its 34% margin last year due to lower revenues, higher losses from investments and joint ventures, and higher selling, general and administrative expenses. 

Mr. Ma Huateng, chairman and CEO of Tencent, declared in the press release that:

“We generate approximately half of our revenues from Fintech and Business Services as well as Online Advertising that directly contribute to, and benefit from, overall economic activity, which should position us for revenue growth as China’s economy expands.”

While this appears to be a positive message from Mr. Huateng, the Chinese economy contracted by 2.6% in the three months to June, compared with market estimates of 1.5%. The country’s statistics agency even claimed that the “foundation of sustained economic recovery is not stable”. The main reasons cited were rising inflationary risks around the globe, tightening monetary policies in major economies, and the impact of domestic COVID-19 outbreaks. 

China is also dealing with an unstable property sector which has fueled a large part of the country’s past growth. This means that more pain could be on the way, directly impacting Tencent’s important Fintech, Business Services, and Online Advertising segments.

How did investors react to Tencent’s earnings report?

The share price was up by 1.28% at the end of trading yesterday, climbing a further 0.23% in pre-market trading. It is likely that, as the day goes on, there could be a sell-off, especially as many investors are nervous about investing in China with the current macroeconomic conditions. The company’s share price is currently down by over 33% this year as investors abandoned tech stocks for safer assets. Does this make Tencent a bad investment? 

Investors with a long-term outlook and higher risk tolerance may view this stock as a bargain as many of the headwinds facing the company are in the short to medium term. Its huge cash pile and focus on key assets may help the company weather the current crisis, but as the past two years taught us, nothing is certain. 

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