Just 18 months ago, Tencent Holdings was on the cusp of becoming Asia’s second trillion-dollar company, as Chinese Internet giants carried the fight for dominance to their US rivals.
But a more than US$560-billion market value wipeout later and with shares slumping to a near four-year low, investor hopes for a smooth recovery are on their last legs.
Next week, Tencent will seek to assure investors about its outlook during second quarter results. They won’t be easy to convince. The company is set to report its first quarterly revenue decline since the 2008 financial crisis, weighed down by a slowdown in gaming sales. A lack of clarity over Beijing’s crackdown is weighing on sentiment as well.
“We need earnings recovery. But we do not see that yet,” said Paul Pong, MD at Hong Kong-based Pegasus Fund Managers, who holds shares. “The biggest problem for Tencent, like many of its peers, is that growth has almost stalled.”
Since Tencent’s stock touched an intraday record in February 2021, it’s tumbled nearly 60% and has lost more value than any other stock globally. Alibaba Group, which has seen shares sink 65% in that time, ranks second in terms of the biggest losses at $495-billion.
The woes plaguing Chinese tech firms are familiar ones. Beijing’s year-long sweeping crackdown has forced a reckoning on the once-mighty sector, burning global funds and causing some analysts to downgrade the sector. And now, news that a slew of Chinese firms are delisting from US exchanges also is weighing on sentiment — mainland tech stocks slipped in pre-market trading in New York.
In late June, e-commerce firm Prosus — whose parent, South Africa’s Naspers, was an early Tencent investor more than two decades ago — became the latest high-profile backer to pare its stake. The shares dropped despite Tencent buying back HK$3.6-billion ($459-million) of its own stock since then.
Read on TechCentral: Naspers-owned Prosus to sell more of Tencent
Part of the problem is that Tencent hasn’t yet received regulatory approval for new videogame licences even as peers get the go-ahead. Player spending on its wildly popular Honor of Kings mobile game has declined for three consecutive months since May, according to data from SensorTower. Covid-linked lockdowns are hurting profits and media reports about layoffs are causing concern.
“The market is pricing in no new game approval for Tencent this year, a double-digit decline in advertising revenue and struggling cloud businesses,” Julia Pan, Shanghai-based analyst at UOB Kay Hian.
Read on TechCentral: Growth evaporates at Tencent, and worse may be to come
Pan, who said that the Prosus sales will cap Tencent’s valuation, expects the firm to cut more jobs in non-core areas to boost margins.
Whether that’s enough for a turnaround is another question. Even as authorities pledge to reverse course and support the tech sector, a number of geopolitical and economic concerns loom, including fears about a global recession and China’s strict adherence to Covid Zero dampening ad revenues.
“Unfortunately we will see more consolidation and layoffs in the Chinese technology sector. Even if the regulatory tightening may ease gradually, the macro environment is challenging,” Pegasus’s Pong said. — Jeanny Yu, (c) 2022 Bloomberg LP
