Mar 20, 2023

Tencent’s $160 Billion Rally Faces Key Earnings Test

Jeanny Yu and Zheping Huang, Bloomberg News

(Bloomberg) -- Tencent Holdings Ltd.’s successful foray into short videos and a softening regulatory backdrop have fueled a $160 billion rally since October, the next leg of which will hinge on a crucial earnings release this week.

Shares of the gaming and social media leader are on track to outperform the Hang Seng Tech Index by the most since the gauge was introduced in mid-2020, gaining 8.3% this quarter even as Alibaba Group Holding Ltd. and JD.com Inc. remain in the red. Much of Tencent’s rally was driven by anticipation of future sales streams and a belief that Beijing will keep its promises of supporting the private sector.

Its revenue likely eked out a gain of 0.2% in the final three months of 2022 after two quarters of contraction, according to analyst estimates ahead of Wednesday’s report. Growth is expected to accelerate to 6.7% in the March quarter.

“Next leg of gains I think will come from evidencing the acceleration of revenue and that’s coming hand in hand with margin expansion,” said Adam Montanaro, investment director of global emerging markets equities at Abrdn Plc. “A key area to watch will be contribution from video accounts, which could help surprise on the upside.”

Analysts have raised Tencent’s price target by 17% since the start of 2023, citing a resumption of new game approvals, recovery in consumption and the growing popularity of its TikTok-style video feed.

A key bright spot has been WeChat’s fledging short-video feed, with the number of views tripling in 2022. Executives forecast 1 billion yuan ($145 million) of ad sales through the feature in the fourth quarter.

Investors also expect Tencent to be a prime beneficiary of China’s post-Covid recovery, which will free up more corporations and consumers to spend on entertainment and advertising, while blockbusters like Valorant and Pokémon Unite are in the pipeline after Tencent secured its first batch of major game approvals in December.

All these positives come against the backdrop of a shifting regulatory environment, with expectations that the height of the crackdown has passed. The government on Monday approved more than a score of foreign online games, sending shares in Korean developers and Chinese firms such as Bilibili Inc. surging.

That’s not to say all is clear for Tencent.

Many industry executives and investors worry that Beijing might once again tighten the reins on tech behemoths should the economy return to its pre-Covid pace of growth. Short-video contents are facing scrutiny as regulators said last month that they are studying measures to curb addition among youths.

At the same time, the firm is grappling with competition from previously unforeseen quarters, including ByteDance Ltd. in advertising. More fundamentally, whether China’s tech sector will ever regain its former glory remains in doubt, with increased competition and authorities’ reluctance to tolerate private-sector expansion.

Yet after a yearslong rout triggered by Beijing’s sweeping regulatory squeeze, analysts are reassessing the stock’s fair valuation — and consensus points to heavy upward potential. Forward earnings estimates have risen by more than 5% this year, according to data compiled by Bloomberg, while analysts’ targets suggest a 29% rise in the shares over the next 12 months.

“There are still a lot of bright spots that may bring upside surprises, so investors should consider buying Tencent options ahead of its earnings,” CMB International Capital Corp.’s wealth management analysts including Jack Tsai wrote in a note last week. “Also, the company could resume share buybacks after earnings.”

Tech Chart of the Day

Meta Platforms Inc. is the best performer in the S&P 500 Index since the stock’s recent low in November, more than doubling in the period. The rebound has been partially driven by the social-media firm’s announcements that it would slash thousands of jobs and cuts costs. Morgan Stanley’s Brian Nowak just restored his buy recommendation almost five months after downgrading to equal-weight, saying Meta is the most durable megacap and its cost cutting has been better than peers such as Alphabet Inc. The stock rose as much as 2.9% on Tuesday.