Tencent, one of China’s largest companies, is currently the worst performing major tech stock, but it might not be for long.

China has been an unavoidable subject in the news recently, the brewing trade war has only continued to escalate and that’s taken a toll on Chinese companies. Tencent, one of the largest Chinese companies as well as one of the largest tech companies on earth, recently missed earnings.

Earnings

Tencent missed earnings on two points. While they may be small misses numerically, they represent a historic change in the company. Tencent missed revenue projections by 3.6 billion yuan or 523 million USD. Considering projected revenues were 77.3 billion yuan and actual revenues were 73.7 billion yuan, this is a small miss. But, this places Tencent at an earnings growth of 30% YOY, making this the slowest revenue growth since Q2 2015.

Tencent also missed on net profit. They raked in only 17.9 billion yuan versus the 19.6 billion expected. This earings miss of 2.3 billion yuan means Tencent profits have declined 2% YOY. Not only that but it also represent a massive 23% drop from the previous quarter. This is the first profit decline since Q3 2015, 13 years ago.   

As we can see these small misses translate much louder when compared to historical performance, and thus Tencent’s drop in value becomes understandable.

Regulation, a cause for financial underperformance

However there does appear to be a direct cause for this underperformance, and that’s the Chinese government itself.

Tencent’s revenue attributes a large portion to it’s gaming products and services. One such game quite popular in north america, is PUBG or “PlayerUnknown’s Battlegrounds”. While it’s become very successful in North America and the rest of the world, PUBG has not been monetized in China yet. PUBG is not the only Tencent game that is being tied up in regulations. Several of Tencent’s other games are either having

monetization frozen or being prevented from being sold entirely.

As game revenue accounts for roughly 40% of Tencent’s’ total revenue, regulation interference from the Chinese government on online video games as a whole greatly damages Tencent’s ability to earn revenues.      

Diversification

Video Games might command a significant portion of Tencent’s revenue. However Tencent has other significant investments and services, such as a Netflix-like streaming service. They own WeChat, the largest messenger service in China with 1.06 billion monthly users. Their own other service as well, including online payment systems as well as ventures into cloud computing.

Each of Tencents other sectors have performed exceptionally. Revenues for payments services, cloud computing, are up 81%. WeChat revenues are growing 9.9% yoy, and their streaming service reported user growth of 30% placing the service at 154 million subscribers.

Recovery

If Tencent is able to shed exposure to the Chinese government’s scrutiny in online games, and better diversify into their other exceptional revenue streams, we may see a turnaround in the stock. Should the Chinese government cease regulatory pressure on the online gaming industry we would also expect to see a significant pop in the stock price.

All in all this seems to be just a road bump for one of China’s largest companies, through effective maneuvering, management will be able to recuperate the “losses” and should be on their way to a recovery in their share price. We believe that by next year, barring any sort of economic or political event, the stock will return close to previous highs set in January.  

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