Tencent share price reverses near-term downtrend despite drop in revenue and earnings

Tencent Results for fiscal period Q2 2023

Tencent Holdings, the investment holding company primarily involved in the provision of value-added services (VAS) and online advertising services, has posted results for the second fiscal quarter of 2023 (Q2 2023).

Financial Highlights for Q2 2023 (vs Q2 2022) are as follows:

• Total revenue down 3% year-on-year (YoY)
• Operating profit (non-IFRS basis) down 14% YoY
• Operating margins (non-IFRS basis) at 27% for the quarter (vs 32% in comparative period)
• Operating profit (on IFRS basis) down 43% YoY
• Operating margins (on IFRS basis) at 14% for the quarter (vs 32% in comparative period)

Comments on results

It has been a tough quarter for Tencent with group revenue in decline for the first time in the company’s listed history. The decline in revenue (and earnings) marked a dovetailing of inhibiting events which include Chinese regulatory uncertainty, a softer domestic economy and some pressure from (less expensive/free) competitor platforms.

However, while the results highlighted a short-term downturn for Tencent, they were not unexpected and more or less in line with consensus. The group has mitigated some of the downside risk quarter on quarter by reducing operating expenditure through labour and advertising costs.

Markets will be hoping to see a rebound in future earnings and revenue as Chinese authorities look to stimulate the region’s economy which has also recently emerged out of what has been a economically stifling pandemic lockdown. The group has, however, suggested that revenues have already started to normalise post the reporting period and hard lockdown environment, specifically in the fintech and advertising segments. Regulatory hurdles, slow approvals and a competitive landscape remain a downside risk to the company’s VAS operations particularly on the gaming front.

Is Tencent selling its stake in Meituan?

Questions remain around the group’s associate investment in Meituan. Tencent Holdings' stake in the delivery business is around $24 billion in value. Reuters newswires have recently suggested that Tencent is looking to divest its holdings in the company, although this has since been vaguely rebutted by the group who has said that ‘this is not accurate’.

Broker ratings and price target

As of the 18^th of August 2022, a consensus of 56 analysts surveyed by Refinitiv suggests a buy rating for Tencent Holdings with a long-term price target of HKD439.78. This suggests that the current share price (on this date) trades at roughly 41% to the longer term fair value assumed.

Tencent Holdings – technical view

The share price of Tencent has recently broken trendline resistance suggesting a short- to medium-term reversal in direction from down to up. The grey area on our chart highlights a bullish momentum to the price action as it gaps higher.

Traders of the short-term momentum might target a move to 329.90, using a close below gap support at 305.90 as a stop loss indication for the trade.