The stock of Tencent Holdings (TCEHY 2.19%) tumbled 5% on March 23 after the Chinese tech giant posted its fourth-quarter earnings report. Its revenue rose 8% year over year to 144.19 billion yuan ($22.6 billion), but that represented its slowest quarterly growth since its Hong Kong debut in 2004.
Tencent's net profit rose 60% to 94.96 billion yuan ($14.9 billion), but that was mainly driven by a massive sale of JD.com (JD 6.12%) shares last December. Excluding that gain and other one-time benefits, Tencent's adjusted net profit declined 25% to 24.88 billion yuan ($3.9 billion).
Should investors accumulate some shares of the Chinese tech giant as the bulls turn away, or is it still too early to bet on its long-term turnaround?
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Its VAS growth slows to a crawl
Tencent generated 50% of its revenue from its value-added services (VAS) segment, which is split between its domestic video games, international video games, and nonadvertising social and streaming media services.
Its VAS revenue rose 7% year over year to 71.9 billion yuan ($11.3 billion) during the quarter, compared to its 8% growth in the third quarter and 28% growth in the year-ago quarter. That slowdown was mainly caused by the sluggish growth of its domestic gaming and social network businesses, which largely offset the stronger growth of its international gaming business.
|
VAS Category |
Q4 2021 Revenue (Yuan) |
Growth (YOY) |
|---|---|---|
|
Domestic gaming |
29.6 billion |
1% |
|
International gaming |
13.2 billion |
34% |
|
Social networks |
29.1 billion |
4% |
|
Total |
71.9 billion |
7% |
Data source: Tencent. YOY = year over year.
Tencent's domestic gaming business was once its main growth engine. But it's sputtered out as the government has imposed tighter playtime restrictions for minors and temporarily suspended the approval of new games last year.
Minors only accounted for 1.5% of its gross gaming receipts during the quarter, but the six-month suspension of new video-game approvals forced Tencent to rely heavily on its aging blockbuster game Honor of Kings, which was initially launched in 2015. Honor of Kings remains the highest-grossing mobile game in China, according to Data.ai, but its stable growth -- along with the launch of new games like Battle of the Golden Spatula and League of Legends: Wild Rift -- barely offset its declining revenue from former hit games like Moonlight Blade Mobile and Peacekeeper Elite.
The international gaming business' growth was supported by new content for Valorant and Clash Royale, an adjustment of its deferred revenue at mobile-game developer Supercell, and its consolidation of Warframe developer Digital Extremes.
That progress is encouraging, but Tencent's overseas business could also face regulatory headwinds. India's regulators have already banned Tencent's games along with dozens of other Chinese apps, while the Committee on Foreign Investment in the United States has been closely scrutinizing Tencent's stakes in American gaming companies.
Tencent's social-networks business generated stable growth through in-app purchases on its livestreaming platforms as well as premium subscription sales on Tencent Video and Tencent Music Entertainment Group. However, all of those platforms could still struggle to expand in the saturated streaming-media market.
The online advertising business gets hit by regulators
Tencent's online advertising revenue, which accounted for 15% of its top line, tumbled 13% year over year to 21.5 billion yuan ($3.37 billion). By comparison, Baidu's (BIDU 0.62%) online marketing revenue rose 1% year over year to 19.1 billion yuan ($3 billion) last quarter.
Tencent blamed that slowdown on China's regulatory crackdown on online education, gaming, and internet service companies, all of which had advertised heavily on WeChat and Tencent's streaming media services. Baidu wasn't as heavily exposed to those troubled sectors.
Its fintech and cloud businesses are still growing...for now
The only bright spot in Tencent's report was its fintech and business services segment, which houses WeChat Pay, Tencent Cloud, and its other cloud-based services. Its revenue rose 25% year over year to 48 billion yuan ($7.5 billion), or 33% of its top line, as the use of its digital payment and cloud-based business services soared across multiple industries.
However, this business could also be targeted by regulators soon. The government has reportedly been probing the use of WeChat Pay in money-laundering schemes, and it might be pressured to spin off the fintech business into a holding company where it can be tightly regulated.
That's all speculation for now, but Ant Group (which owns WeChat Pay's closest competitor, Alipay) was also probed by regulators and forced to restructure its business as a financial holding company last year.
Those moves indicate the Chinese government doesn't want private digital-payment platforms to overpower state-backed banks. Therefore, investors who expect Tencent to offset the slower growth of its gaming business with the expansion of its fintech business could be sorely disappointed.
Tencent's future still looks murky
Analysts expect Tencent's revenue to rise 13% in 2022, but for its net profit to decline 37% as it laps the JD divestment. In 2023, they expect its revenue and net income to rise 17% and 27%, respectively.
Tencent's stock looks reasonably valued at 22 times forward earnings, but it probably won't rally until its domestic gaming business stabilizes, its advertising business recovers, and its fintech business avoids Ant Group's fate. For now, investors should avoid Tencent and stick with more-promising growth stocks in this challenging market.
