People walk past a Tencent sign at the company’s headquarters in Shenzhen, Guangdong province, China, August 7, 2020.
David Kirton | Reuters
According to analysts, Tencent could report its first year-over-year revenue decline when it reports second-quarter earnings on Wednesday, as a Covid-induced slowdown in the Chinese economy and ongoing challenges in the domestic gaming market could prove strong headwinds for Company.
The Chinese gaming and social media giant is expected to report revenue of 132.2 billion yuan ($19.5 billion) in June, down more than 4% year on year, according to consensus forecasts from Refinitiv. Net profit is expected to fall by nearly 30% to 23.8 billion yuan.
Tencent, which operates China’s largest messaging app WeChat, is getting a lot of revenue from gaming and advertising, two areas that are likely to take a hit in the second quarter.
“We are factoring in more conservative assumptions for online games and ad revenue in the second quarter due to global macro headwinds and the outbreak of the pandemic. We expect the headwinds to lead to less spending for foreign gamers,” analysts said. Jefferies in a last published note. month.
During the quarter from April to June, China saw a resurgence of Covid-19 leading to the lockdown of major cities, especially the financial metropolis of Shanghai, as authorities continue the country’s “Zero Covid” policy.
The Chinese economy grew by just 0.4% in the second quarter, falling short of analyst expectations. Macroeconomic headwinds are likely to lead to lower consumer spending and less advertising, two areas Tencent relies on.
For the April to June quarter, e-commerce giant Alibaba reported flat revenue growth for the first time due to sluggish consumer spending.
Jefferies forecasts that Tencent’s online advertising revenue fell 29% year-over-year to 16.3 billion yuan in the second quarter. That is a sharper decline than was reported in the first quarter.
“We expect the softness to come from the outbreak of the pandemic and uncertainties in the macro environment, as well as the high base of certain industry categories (including education and gaming),” Jefferies said.
Headwind gaming
Game revenues, which account for about a third of Tencent’s total revenue, will be the focus for investors.
The gaming sector in China continues to face challenges. Last year, Chinese regulators said that children under 18 should only be allowed to play online games for up to three hours a week and only at specific times.
Although Tencent has said in the past that minors are only a small part of its revenue, some of the effects are being observed.
Regulators also froze new game approvals in China from last July and only started giving the green light for new titles again in April. In China, games must be approved by regulators to generate revenue. China has heavy censorship on game content.
China Renaissance analysts said in a note published last month that Tencent launched only three mobile games in the second quarter, so there will be a “limited contribution” to new title revenue. Analysts predict “flat” online gaming revenues in the second quarter, with domestic gaming revenues down 3% and international gaming revenues down 8% year-on-year.
Tencent and its rival NetEase have looked forward to international gaming expansion as the domestic market has slowed, developers have taken over or new studios have opened.
Jefferies analysts are optimistic about the future potential of Tencent’s overseas drive.
“Overseas, Tencent has a solid pipeline of about 30 titles that will be released in the coming years,” they said. “In addition to mobile games, Tencent also has console games in the pipeline. It is pursuing multifaceted strategies for overseas expansion, such as setting up local operations teams, self-development and publishing.”
Meituan divestment, cloud in focus
Investors will be eyeing a few other areas of Tencent’s business.
On Tuesday, Reuters reported that Tencent plans 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 their plans in this area.
Tencent’s fintech and cloud businesses are also key areas for the company. Tencent operates one of China’s largest mobile payment platforms called WeChat Pay. China Renaissance said it forecasts just 2% year-over-year revenue growth for fintech due to the Covid resurgence.
Cloud business growth may also be hampered by “project delays and softness in offline operations” due to the pandemic, Jefferies said.
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