Shares of the internet giant, which runs the world's largest video gaming business by revenue and China's biggest social media platform WeChat, fell 7 per cent in Hong Kong on Thursday to lead a broad-based rout of China tech stocks, a day after the Shenzhen-based firm also reported a 51 per cent decrease in quarterly profit.
That significant profit decline last quarter may be more worrisome than the company's flat sales growth, according to Michael Norris, research and strategy manager at Shanghai-based consultancy AgencyChina.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
"It raises questions about how tighter regulation and a slowing economy could structurally decrease the earning power of China's dominant tech platforms," Norris said.
People walk past Tencent Holdings' headquarters in Shenzhen, in southern Guangdong province. Internet giant Tencent reported lacklustre first-quarter results on May 18, 2022. Photo: Agence France-Presse alt=People walk past Tencent Holdings' headquarters in Shenzhen, in southern Guangdong province. Internet giant Tencent reported lacklustre first-quarter results on May 18, 2022. Photo: Agence France-Presse>
The disconcerting quarterly performance of Tencent, China's most valuable tech company, showed how shrinking economic activity has cast a pall over the whole internet industry.
"While it may be fashionable to point the finger at the regulatory landscape, Tencent's flat revenue growth reflects a broader economic slowdown in China," said Norris, citing the company's depressed advertising business.
The tech giant's ad sales, which were down 18 per cent to 18 billion yuan (US$2.7 billion) in the March quarter, saw the sharpest decline among its major business segments.
That was affected by the Covid-19 lockdown in Shanghai, the Chinese financial metropolis where many companies run their budgets, according to Tencent chief strategy officer James Mitchell in the firm's conference call on Wednesday.
China is battling its worst Covid-19 outbreak in more than two years, with the stringent coronavirus control measures imposed on both Shanghai and Beijing proving to be particularly damaging. While the country's economy grew by 4.8 per cent in the first quarter, lockdowns are taking an increasing toll on business activities.
Major indicators measuring the state of the world's second-largest economy fell short of expectations in official data released on Monday, with industrial production, retail sales, fixed-asset investment and the surveyed jobless rate falling to their weakest levels in more than two years.
Covid-19 lockdown measures have also disrupted both online and offline transactions, as Tencent reported weak commercial payment activities since mid-March.
"Its fintech division had provided a promising revenue source," said Daphne Liu, associate professor at ESSEC Business School Asia-Pacific in Singapore. "But the Covid-19 lockdowns, especially in Shanghai, have significantly hampered its contribution in the first quarter."
The economic slowdown also hammered the first-quarter results of Chinese e-commerce giant JD.com. It reported on Wednesday a 3-billion yuan loss because of logistics disruption and weak consumer spending, in sharp contrast to its 3.6 billion yuan profit in the same period last year.
"Those hoping for a rebound in China tech stocks will come away disappointed, as 2022 is unlikely to feature meaningful revenue or earnings catalysts," AgencyChina's Norris said.
Still, Tencent and its tech industry peers have something to look forward to.
Tencent president Martin Lau Chi-ping, however, has indicated that it was too early to tell when that support will translate into positive initiatives for the industry. "It will take some time for the corrective measures to be turned into normalised regulation, and then the specific supportive measures will be introduced," Lau said in the firm's conference call on Wednesday.
On the government's decision last month to end a freeze on new video game approvals, Tencent CSO Mitchell said the number of game licences will be fewer, compared to the pre-2018 level, because regulators have prioritised quality over quantity.
Other market analysts, however, expect the government's show of support to spark an industry turnaround in the second half of this year.
"I'm expecting revenue and adjusted earnings growth to come back in the third quarter this year," said Ivan Su, equity analyst at Morningstar.
"In my opinion, regulations impact sentiment much more than fundamentals," Su said. "If we're talking about just stock price performance, more game licence releases will help, and so will an official announcement of the completion of ratifications."
