China’s Tech Giant Tencent Faces Its First Revenue Decline


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According to average estimates from Refinitiv, Tencent will announce second quarter revenue of 132.2 billion yuan ($19.5 billion), a decrease of more than 4% from the same period last year.
The Chinese economy’s downturn brought on by Covid and the ongoing difficulties facing the domestic gaming business might prove to be significant hindrances.
Gaming and advertising may be under strain if consumers continue to spend little money on gaming and corporations reduce their advertising budgets.
Tencent must also contend with China’s stricter gaming regulations.

Image Source- CNA

Analysts predict that Tencent could report its first year-over-year revenue decline in company history when it releases its second quarter earnings on Wednesday. The company may face significant challenges due to the Chinese economy’s slowdown brought on by Covid as well as ongoing difficulties in the domestic gaming market.

According to consensus estimates from Refinitiv, the Chinese gaming and social media giant will post June quarter revenue reaching 132.2 billion yuan ($19.5 billion), a decrease of more than 4% from the same period last year. A decrease in net income of about 30%, to 23.8 billion yuan, is anticipated.

Gaming and advertising, which are two industries that are expected to have suffered in the second quarter, are major sources of revenue for Tencent, which manages WeChat, the largest messaging app in China.

“Due to global macro-headwinds and the pandemic epidemic, we factor in more cautious estimates to online gaming and advertising revenue in the second quarter. In a report released last month, analysts at Jefferies predicted that the headwinds would cause international gamers’ spending to decline.

In accordance with the government’s “Zero Covid” policy, China had a resurgence of Covid-19 during the April to June quarter, which prompted the lockdown of many important cities, most notably the financial hub of Shanghai.

Analyst estimates were not met by China’s second quarter economic growth of just 0.4%. Two areas on which Tencent depends, slower consumer spending and a reduction in advertising, are anticipated to result from macroeconomic headwinds.

Alibaba, a major online retailer, originally announced flat revenue growth for the April to June quarter due to weak customer spending.

According to Jefferies, Tencent’s online ad income decreased 29% year over year to 16.3 billion yuan in the second quarter. That represents a greater decline than what was initially stated.

According to Jefferies, “We estimate the weakness to have stemmed from the pandemic epidemic and uncertainty in the macro environment, as well as the high base from some business categories (particularly gaming and education).”


Investors’ attention will be focused on Tencent’s gaming income, which makes up around a third of its overall revenues.

The gaming industry in China is still having trouble. Chinese authorities said last year that minors under the age of 18 will only be permitted to play online games for a maximum of three hours per week, and only during designated hours.

Even while Tencent has previously claimed that minors only make up a small portion of their earnings, certain consequences are already being felt.

Additionally, regulators in China stopped approving new games in July of last year and just started doing so again in April. In China, monetization of games requires regulatory approval. The contents of games are subject to strict control in China.

There will only be a “limited contribution” to income from new titles, analysts at China Renaissance said in a report released last month. Tencent only released three mobile games in the second quarter, they added. The second quarter’s online gaming revenue is expected to be “flattish,” with domestic revenue down 3% and overseas revenue increasing 8% compared to the same period last year.

As the local gaming business has stalled, Tencent and its rival NetEase have focused on expanding internationally by hiring developers or creating new studios.

The analysts at Jefferies are optimistic about Tencent’s international expansion’s future prospects.

“Tencent has a strong pipeline of roughly 30 games that will be published overseas in the upcoming years,” they claimed. Tencent is developing console games in addition to its mobile gaming offerings. It seeks multifaceted tactics for international growth, including creating local operations teams, investing in oneself, and publishing.

Meituan withdrawal, cloud control

Investors will be paying close attention to a few additional aspects of Tencent’s operations.

According to Reuters, Tencent intends to sell the majority of its $24 billion interest in the world’s largest meal delivery company Meituan. According to a person with knowledge of the situation, Tencent has no present intentions to sell its investment. Investors are eager to learn more about Tencent’s objectives in this area from its leaders.

Fintech and cloud services are two more crucial sectors for Tencent. WeChat Pay, one of China’s largest mobile payment systems, is operated by Tencent. Due to the Covid revival, China Renaissance claimed it only expects 2% year-over-year revenue growth for the fintech sector.

According to Jefferies, the pandemic may potentially hinder the growth of the cloud sector owing to “project delays and weakness in offline activity.”


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