Tencent Holdings had plenty to cheer about early last Wednesday when its shares soared in Hong Kong to an all-time high of HK$328.60 (US$42 cents), a week ahead of the video games and social media titan’s interim earnings announcement.
Most of those gains, however, were quickly wiped out on Friday after China’s online watchdog launched an investigation into Tencent’s WeChat, Weibo Corp’s Twitter-like service and Baidu’s Tieba communications platform for possible violations of the country’s new Cybersecurity Law. Its shares lost 5 per cent to HK$310.60 by the close of trading.
But most remain unfazed and bullish on Tencent, based on recent experience.
Those shares also got hammered early last month, when nearly HK$136 billion of the company’s market value was wiped out, after the People’s Daily newspaper criticised its popular smartphone game Honour of Kings as a “poison” and “drug”, especially harmful to young players.
Shenzhen-based Tencent, the world’s largest games company by revenue, responded by imposing a series of controls to limit the playing time of gamers below 12-years-old and those up to 18 years old.
Soon after that, Tencent’s shares started a steady ascent, while analysts forecast a solid quarter ended June 30, which will have bolstered the company’s interim financials.
“Tencent’s second-quarter results will be a replay of its first quarter,” said Nomura analyst Shi Jialong. “Mobile gaming and pay-for performance advertising revenue [from social media advertisements] likely maintained strong momentum, while display ads remained weak.”
Analyst estimates suggest Tencent should report second-quarter revenue of 52.5 billion yuan (US$7.9 billion), which would represent a 47 per cent increase from 35.7 billion yuan revenue in the same period last year, and up 6 per cent from its 49.5 billion yuan first-quarter revenue this year.
Second-quarter net profit is expected to reach 13.7 billion yuan, according to consensus estimates, which would be a rise of 28 per cent from 10.7 billion yuan a year earlier, but down 5 per cent from 14.5 billion yuan in the first quarter.
Alicia Yap, the head of regional internet research at Citi Research, predicted Tencent to post a 64 per cent year-on-year increase in smartphone games revenue in the second quarter, to 15.7 billion yuan, led by Honour of Kings.
“Honour of Kings has maintained its number one position in China since November 2016,” Yap said.
Half of the mainland’s top 10 mobile games by monthly gross revenue in June were from Tencent, according to analyst firm App Annie.
Apart from Honour of Kings, its other top-ranked Tencent titles were Tian Long Ba Bu Mobile, Contra Return, Dragon Next and JX Online.
Jefferies equity analyst Karen Chan estimates the monthly active user base of Honour of Kings had stabilised at 182 million by the end of June.
“There is potential upside from overseas expansion,” Chan said. “Honour of Kings is currently available in Europe under the title Strike of Kings and in Thailand as RoV: Mobile Moba.”
Research firm Newzoo recently forecast global video games sales to top the US$100-billion mark this year, driven by the estimated 565 million gamers on the mainland.
Tencent’s games business remains its largest revenue source, while the company pursues other endeavours, including financial services, cloud computing and artificial intelligence.
Citi’s Yap said social advertising is expected to be a future growth driver at Tencent, bolstered by the huge number of users on its social platforms WeChat, known as Weixin on the mainland, and QQ.
WeChat has 928 monthly active user accounts by March 31, while QQ had 861 million.
Advertisers in about 28 industries, including travel, retail and entertainment, can place their campaigns on WeChat’s newsfeed feature called Moments.