Tencent’s massive gaming division likely boosted the company’s first-quarter results as people in China turned to smartphone-based entertainment while locked down at home.
But the crown jewel in China’s second-most valuable tech firm is facing rising competition from rivals. And Tencent could also be facing headwinds in advertising as well as its fast-growing fintech and cloud division.
Tencent will report first quarter 2020 earnings after the Hong Kong market close on Wednesday. This is what analysts are expecting from the headline figures, according to Refinitiv data:
Revenue of 101,4 billion yuan ($14,3 billion)
Profit attributable to equity holders of the company of 23,83 billion yuan
Online gaming represents over 28 percent of Tencent’s gaming revenue and is a crucial part of its business at home and internationally. The division is made up of revenue from smartphone games and PC games. Analysts at Jefferies expect smartphone game revenue to jump 49 percent year on year in the first quarter to 31,6 billion yuan thanks to the strong performance of two key titles — “Honour of Kings” and “Peacekeeper Elite.”
Meanwhile, Jefferies expects PC games to post a 17 percent year-on-year decline in revenue.
“We expect Tencent to deliver a solid set of 1Q20 results with strong performance of smartphone games,” Jefferies said in a note dated April 22.
Analysts at China-based Guotai Junan Securities expect a “rich smartphone games pipeline” for the rest of the year.
Tencent is China’s largest gaming firm. But it is facing growing competition from others including NetEase and younger rival ByteDance, owner of TikTok. In March, Chinese regulators granted ByteDance its first licence to monetise a game. Any company wishing to make revenue from a game in China requires approval from the government.
ByteDance’s efforts in gaming are still very new and unlikely to be a threat to Tencent in the near term. But the TikTok owner appears to be serious about its prospects. In January, Bloomberg reported the company is building up a gaming division made up of over 1,000 employees.
Tencent could face slowing online advertising growth given an overall slowdown in the China market.
Research firm eMarketer said total ad spend in China in 2020 will total $113.67 billion, representing year-on-year growth of 8,4 percent, the slowest since it started tracking figures in 2011. Tencent makes money through advertising via social media features on its WeChat messaging app which has over one billion users globally. It also has ads on other platforms like its streaming service Tencent Video.
Jefferies estimates online advertising to grow 16 percent year on year to 15,4 billion yuan in the March quarter with social ads — those mainly on WeChat and another app QQ — growing 28 percent from last year.
Media ads, however, are likely to decline 20 percent in the same period, the analyst firm said.
That overall growth rate of 16 percent for Tencent’s ad segment would be slower than the 19 percent posted in the fourth quarter of 2019.
“Media advertising is expected to remain under pressure due to the negative impact of Covid-19 and macro headwinds, even when facing loosened content regulation on the online video industry,” Guotai Junan Securities said in its note.
Tighter rules on content from the Chinese government in the past couple of years has hit advertising in that segment.
However, Guotai Junan Securities’ report said advertising is likely to rebound in the second quarter of the year thanks to an improving macro-economic environment and the improving monetisation potential of WeChat.
A fast-growing area of Tencent’s business in recent quarters has been its fintech and business services division which includes cloud computing. WeChat Pay is one of China’s largest mobile payment systems alongside Alibaba’s Alipay.
The outlook for this business is less clear in the first quarter. China Renaissance said in a note published April 28 that it expects year-over-year revenue growth for this unit to slow to 11 percent in the first quarter versus 39 percent in the fourth quarter of 2019. The investment bank said the likely fall will be due to a “sharp decline in offline transactions and deferred spending on cloud services amid the Covid-19 outbreak.”
Guotai Junan Securities said that the coronavirus outbreak will likely “postpone implementation of cloud related initiatives and would thus decelerate the Company’s cloud services revenue” in the first quarter.
Jefferies, however, is more bullish with its analysts forecasting the fintech and business services division to grow 24 percent year over year in the March quarter to 27 billion yuan. — CNBC.