While US stock markets hover at all-time highs, investors may be forgiven for not paying attention to one of the largest stock markets in the world; China.
That’s understandable. Investors have been burned by a massive crackdown on China’s tech giants by the government, resulting in the destruction of hundreds of billions of dollars in companies’ market caps.
However, some of these businesses are continuing to hold up well and one of the best-performing Chinese tech companies over the past 15 years or so – Tencent Holdings Ltd (SEHK: 700) – just happened to report its third-quarter results last week.
Between the two best-known tech giants – Tencent and Alibaba Group Holdings Ltd (SEHK: 9988) (NYSE: BABA) – I feel like the WeChat and global gaming giant is the better investment right now.
So, how did Tencent do in its latest quarter and is the stock set for a recovery? Here’s everything investors need to know.
Gaming revenue growth slows
Overall, Tencent saw third-quarter revenue expand by 13.5% year-on-year to RMB 142.4 billion (US$22.3 billion). That was a slight miss on consensus expectations for RMB 145 billion in revenue.
It was also a further deceleration of revenue growth, which was 25% in the first quarter and 20% in the second quarter.
The company’s Value Added Services division – which houses its lucrative gaming business – saw year-on-year revenue growth of just 7.7% to RMB 75.2 billion.
Under that umbrella, Domestic Games saw even slower revenue growth of 5.1% year-on-year to RMB 33.6 billion.
However, investors can take heart that Tencent’s gaming prowess is global given its International Games business saw robust 19.6% year-on-year revenue growth to RMB 11.3 billion.
That has been driven by an incredibly strong stable of games (see below) that also have staying power, including PUBG Mobile, which itself was the most-downloaded gaming app globally in the third quarter of this year – clocking in over 70 million downloads.
Source: Tencent Q3 2021 earnings presentation
This partially offset the obvious “chill” caused by regulators in the local gaming industry.
That’s in reference to regulations that saw under-18s in China being restricted to playing games from 8-9pm on Fridays, Saturdays and Sunday only, with effect from 1 September 2021.
Not only that but in early September it was reported that regulators in China are slowing approvals for new games.
While under-18s contributed 4.8% to Domestic Games gross receipts in September 2020, this figure had dropped to 1.1% in September of 2021.
Fintech continues to show strength
Meanwhile, what really proved to be the shining light for Tencent so far this year has been its Fintech and Business Services division, which house its payments platform and various B2B software solutions.
That again proved to be the case in the third quarter. Revenue from this division saw 30% year-on-year growth to RMB 43.3 billion.
Whereas Fintech and Business Services only made up 26% of overall revenue for Tencent in the same quarter in 2020, in the latest quarter this share had risen to 30%.
This was helped by growth in commercial payment volume in fintech, while on the business services side, the increasing digitalisation of various industries is helping Tencent gain a foothold in software solutions.
For example, management said that its CRM SaaS solution Tencent QiDian has helped over one million enterprises in China enhance cost efficiency in customer services.
In the process, it has won contracts with large-scale enterprises such as Dell Technologies Inc (NYSE: DELL), SF Express and Siemens.
Looking overseas
While there has been recent news out that insiders at gaming companies in China have reportedly said approvals for games is likely to resume soon.
Clearly, banking on the local gaming market isn’t an appetising option for investors that have to deal with President Xi’s “Common Prosperity” pledge. Thankfully, Tencent still has a strong pipeline of games in international markets.
Long-term investors in Tencent will have to grapple with increased regulations in China around gaming but on the international front, its business looks strong.
Having bounced nearly 4% since its earnings report last week, Tencent shares are down around 12% so far in 2021.
For those of us who still believe in the company’s long-term future, the latest earnings confirm that it remains on the right track.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.
