Tencent’s Q3 Earnings: What to look out for

Chinese gaming giant Tencent Holding’s (TCEHY) share price was down a massive 36% from the start of the year on Friday. On close, the share price was $37.85 –  it had touched $61 in January.

When Tencent announces Q3 earnings on Wednesday, investors will be looking at the fallout from the Chinese government’s clampdown on video-games and for growth in its streaming and cloud computing businesses to see if the company is worth investing in.

Last quarter, the company posted revenues of $11.14billion, a 30% increase year on year. Zack’s Consensus Estimate for Q3 revenues is $11.66billion, a yearly growth of 19.3%.

Tencent Share Price: 1 January to 9 November 2018 (Source: Yahoo Finance, 11.11.2018)

What to look for in Tencent’s gaming business

Nothing has hit Tencent’s share price harder than the Chinese government’s concerns over video game addiction. In China these aren’t just existential concerns, but damaging changes in regulation.

In the country, no new video game licenses have been approved since March. More damagingly, regulators have not approved Tencent to monetize PlayerUnknown’s Battlegrounds  (PUBG) on mobile through in-app purchases. In theory, in-app purchases on this game would be worth $1billion. Part of the crackdown also saw authorities stop Tencent selling money-maker Monster Hunt: World. Between 20-22 March, over 13% was wiped of Tencent’s share price.

Staying on the right side of the Chinese authorities will be paramount for any clawback in its video games’ business.

To help, the company announced last week that it will expand its addiction-prevention system to all games. The system puts time limits on daily play and even has facial recognition ID checks. It is already in operation on the wildly popular Honor of Kings.

However, international expansion for Arena of Valor and PUBG mobile, alongside strong domestic adoption of MT4 and Saint Seiya could drive growth in Tencent’s video games’ business.

Whether the recent clampdown has already been priced into the share price will determine if there’s any upside here. With China’s regulatory authority not being overhauled until next year, significant moves here could well be paused.

What else to look out for

While video games account for 40% of revenue, it’s not the only area to look out for. Investors will be looking at any growth in Tencent’s Netflix-like streaming service – last quarter subscriptions were up 30% year-on-year – and its online advertising program. However, both have been growing at a slower rate than last year.

Then there’s WeChat, which last quarter saw active users climb to 1.06 billion. If recently introduced new features have been adopted in any significant number, then it might add to the bottom line.

The fastest growing area for Tencent has been payments and cloud computing. Users of its payment service was 80 million at last count, while revenue from its cloud computing business has been doubling over the past couple of years. Growth in these areas could be enough to turnaround Tencent’s share price after the recent headaches in its video games’ business.