First quarterly revenue decline forecast

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

David Kirton | Reuters

Tencent Analysts could post a record drop in first-year revenue when it reports second-quarter earnings on Wednesday, according to analysts, because of the Covid-induced slowdown in the Chinese economy and challenges Continuity in the domestic game market can prove to be strong advantages for the company.

According to consensus forecast from Refinitiv, China’s gaming and social media giant is expected to report June quarter revenue totaling 132.2 billion yuan ($19.5 billion), down 4% higher than the same period last year. Net income is forecast to drop nearly 30% to 23.8 billion yuan.

Tencent, operator China’s largest messaging app WeChatgenerates a large amount of revenue from games and advertising, two areas that are likely to hit the mark in the second quarter.

“We make more conservative assumptions for online games and ad revenue in Q2 given global macro trends and the outbreak of the pandemic. We expect headwinds. will lead to softening in overseas player spending,” Jefferies analysts said in a note published at the end of the month.

During the April-June quarter, China saw a resurgence of Covid-19 resulting in the closure of major cities, most notably financial metropolis of Shanghaiwhen the authorities continued with Policy “Zero Covid”.

China’s economy grew only 0.4% in the second quarter, falling short of analysts’ expectations. Macroeconomic difficulties could lead to slower consumer spending plus cuts to advertising, two areas on which Tencent depends.

During the April-June quarter, the e-commerce giant Alibaba reports flat revenue growth for the first time on sluggish consumer spending.

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

“We expect softness from the outbreak of the pandemic and uncertainties in the macro environment, as well as a high background from certain industries (including education and games),” said Jefferies. play).

Headwinds in the game

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

China’s gaming sector 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 during specific times.

While Tencent has previously said that minors make up a tiny fraction of its revenue, some impact is being seen.

Regulators also froze the approval of new games in China from last July and just started green light for new titles in April again. In China, games need regulatory approval in order to be monetized. China has strict censorship over the content of games.

Analysts at China Renaissance said in a note published last month that Tencent only launched three mobile games in the second quarter so there would be a “limited contribution” to revenue from new titles. . Analysts are forecasting “flat” online game revenue for the second quarter with domestic game revenue down 3% and international game revenue up 8% year over year.

Tencent and its rival NetEase yes towards the international expansion of the game as the domestic market growth slows down, acquiring developers or opening new studios.

Jefferies analysts are optimistic about Tencent’s potential for overseas growth in the future.

“Overseas, Tencent has a solid system of about 30 titles that will be released in the next few years,” they said. “Besides mobile games, Tencent also has console games. It pursues multi-pronged strategies in overseas expansion such as establishing local operations teams, self-development as well as publish.”

Divest Meituan, focus on the cloud

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

On Tuesday, Reuters reported that Tencent was planning to divest its majority stake worth $24 billion in food delivery giant Meituan. A source with knowledge of the matter told CNBC that Tencent currently has no plans to sell its shares. Investors will be hoping to get feedback from Tencent executives on their 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 says it forecasts full-year revenue growth of just 2% for fintech due to the Covid resurgence.

Growth in the cloud business could also be hampered by “project delays and weakness in offline operations” because of the pandemic, Jefferies said.

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