Tencent's record earnings defy worries Tencent's record earnings defy worries Tencent's record earnings defy worries

Tencent's record earnings defy worries

Photo credit: Freer / Shutterstock.com

Since the beginning of this year, Tencent stock has been punished; investors have sold off $90 billion of the stock since its January highs.

Markets have been concerned about Tencent’s willingness to sacrifice margins in favour of long-term growth in new areas like cloud computing, entertainment, and offline retail. The firm's Q1 earnings numbers, however, have defied that narrative. The years of investment in online services and digital content have paid off in subscription growth numbers. The core business is also showing resilience in growth, calming negative sentiment.

Highlights

Net income up to 23 billion yuan.
Revenue rose 48.4%, higher than expected.
Gross profit margin more than 50%, expectation was 47%.
Smartphone gaming showed a 68.2% rise in Q1 growth with the core coming from Honour of Kings.
WeChat topped 1.04 billion monthly active users.
Profit rose 60.9% (y/y) to 3.7 billion yuan, and 12% (q/q).
Online advertising revenues grew by 55.2%.

Tencent has continued to gain market share in both the PC and mobile gaming markets, this coming from robust Intellectual property sourcing capability and distribution power. 

Mobile gaming should remain a profit driver for Tencent. The company is well positioned to strengthen its lead in China’s online gaming market as the WeChat user base has reached more than 1.04 billion users and counting. The company’s continuous investments in first-class game developers is continuing to yield popular games and increase user engagement.

According to iResearch, mobile games account for more than half of China’s gaming market and are poised to extend as desktop gaming declines; Tencent should be a long-term beneficiary of this consolidation.

Tencent’s ability to ramp up monetisation on mobile ads, games, and other platforms has strong potential due to healthy mobile traffic that is on the rise and strengthening over time. The WeChat user base has reached more than 1.04 billion users, represent a high level of engagement that has the capacity to be further monetised through increased social ad inventories.

WeChat is fast becoming the ecosystem where Chinese consumers shop and will shop in the future. Luxury brands are realising that WeChat is an important part of the shopping experience for Chinese consumers, with Givenchy notably opening a WeChat store.

The opportunity for Tencent to further monetise the platform still exists as social e-commerce is a growing trend in China.

Tencent’s long-term sales growth will be maintained by its dominance over the social networking space in China, and through continued monetisation of apps and services. The investments in video and music services should also play apart in increasing future revenue streams as these services can be marketed to a growing and highly engaged user base on WeChat.

While the heavy investments in long-term growth in new areas like cloud computing, AI, and offline retail may sacrifice margins in the short term, Tencent scores highly on both Momentum and Reversal in our proprietary model (see chart below).

Downside risks: a lack of new game titles, increased competition from new social platforms or other initiatives would lead to increased investments and margin pressure.

Equity radar conviction list: Hong Kong

Our in-house developed quant model, Equity Radar, is Saxo's household product for screening the global equity market. It scores the 1,200 largest stocks on six equity factors (value, yield, quality, momentum, reversal, and volatility) normalised within each industry, thus providing an inspirational conviction list of equity picks.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992