First Quarter Earnings Decline Projected

Analysts said Tencent could record its first-ever year-over-year revenue decline when it reports second-quarter earnings on Wednesday. A strong headwind for the company.

The Chinese gaming and social media giant is expected to see revenue total 132.2 billion yuan ($19.5 billion) in the June quarter, down more than 4% year-on-year, according to Refinitiv’s consensus forecast. Net profit is expected to fall by nearly 30% to 23.8 billion yuan.

Tencent, which operates WeChat, China’s largest messaging app, sees big revenue from gaming and advertising, two areas likely to take a hit in the second quarter.

“Global macro headwinds and the outbreak of the pandemic have priced in more conservative assumptions for online gaming and advertising revenue in the second quarter,” said Jefferies analysts. We expect this to lead to a softening of the market,” analysts at Jefferies said in a note issued last month.

Between April and June, China saw a resurgence of Covid-19, with major cities, especially the financial city of Shanghai, on lockdown as authorities continued the country’s “zero Covid” policy.

China’s economy grew just 0.4% in the second quarter, weaker than analysts expected. Macroeconomic headwinds, along with a slowdown in consumer spending, could lead to a cut in advertising, two of his areas Tencent relies on.

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

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

“We expect softness due to the outbreak of the pandemic and macro-environmental uncertainty, as well as the high base in certain industry categories (including education and gaming),” Jeffries said.

Gaming revenue, which accounts for about one-third of Tencent’s total revenue, is the focus of investors’ attention.

China’s gaming industry continues to face challenges. Last year, Chinese regulators announced that children under the age of 18 can only play online games for up to three hours per week and only during certain hours.

Tencent has said in the past that minors account for only a small portion of its revenue, but we are seeing some of the impact.

Regulators have also frozen the approval of new games in China since last July and began green-lighting new titles again in April. In China, regulatory approval is required to monetize games. China has strict censorship on game content.

Analysts at China Renaissance said in a note published last month that Tencent released only three mobile games in the second quarter, resulting in a “limited contribution” to revenue from new titles. increase. The analyst expects online game revenues to remain “flat” in the second quarter, with domestic game revenues down 3% year-on-year and overseas game revenues up 8%.

Tencent and its rival NetEase are looking to expand their games internationally as the domestic market slows, buying developers and opening new studios.

Analysts at Jefferies are bullish about the prospects of Tencent’s overseas expansion.

“Overseas, Tencent has a solid pipeline of about 30 titles slated for release in the next few years,” they said. “In addition to mobile games, Tencent also has console games in its pipeline.

Investors are eyeing a few more areas of Tencent’s business.

On Tuesday, Reuters reported that Tencent plans to sell most of its $24 billion stake in food delivery giant Meituan. A source familiar with the matter told CNBC that Tencent currently has no plans to sell its stake. Investors would love to hear from his Tencent executives about plans in this space.

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 fintech revenues to grow by just 2% year-on-year due to the Covid resurgence.

Jeffries said the pandemic’s “delayed projects and looser offline activity” could also hamper cloud business growth.