Tencent shares: results highlight strong growth despite regulatory headwinds

Tencent H1 2021 results highlights

The below highlights from the first half of 2021 (H1 2021) results use the prior year’s interim period (H1 2020) as a base of comparison:

• Total revenue up 23% to RMB273 billion
• Operating profit increased by 17% to RMB85.6 billion ($13.2 billion)
• Operating margin decreased to 31% from 33% last year
• Profit for the period increased by 18% to RMB69.6 billion
• Net margin decreased to 25% from 27% last year
• Basic earnings per share (EPS) were RMB7.055
• Diluted EPS were RMB6.916

While investor concerns that regulatory clampdowns on Asian listed ecommerce companies’ such as Tencent are to disrupt earnings, the group’s interim and quarterly update continues to show a robust business which is growing ahead of estimates and against a strong base of comparison in the prior year.

A divisional breakdown sees revenue growth led by the groups FinTech and Business Services operations in the second quarter (Q2) of 2021 year-on-year (YoY). Revenues in the group’s Online Advertising space were also substantial having grown 23% in the quarter (YoY). However, the groups Valued-added services (VAS), which includes online gaming (a key regulatory focus), saw growth lagging the other segments having added just 11% (YoY).

Regulatory pressure and remedial action

Recent regulatory action has seen Tencent barred from entering into exclusive music rights agreements estimated at a merger value of $5.3 billion just last month. Chinese state media has added pressure to the regulator and in turn Tencent on the suggestion that online gaming is having a negative impact on children. Regulatory pressure also saw financial and security concerns equate to a brief suspension of new Chinese users being onboarded to Tencent’s WeChat platform.

Tencent has remained respectful of Chinese authorities by fast announcing new measures to limit the time and money children within the region spend on games. The company has also been upgrading its security features for WeChat to ensure regulatory compliance is adhered to.

Tencent results were released after market close (Hang Seng Index) on 18 August 2021. At the time of writing the share price has not yet had a chance to react to the results, which are assumed as favourable.

The price trend for Tencent remains down for the time being, with the next level of support considered at $404.50. A favourable reaction to the results update could however see a rebound back towards short term resistance at $491.20. However traders who are looking to long positions would be trading against the trend right now, and might prefer to instead wait for further confirmation that the downtrend has been broken to the upside. A move above the red trend line on our chart (should it occur) might provide such confirmation.

Summary

• H1 2021 revenue increased by 23% against the prior year’s comparative period
• Operating profit for the period increased by 17%
• The FinTech and Business Services division saw the most substantial revenue growth in Q2 (+40%)
• The VAS division saw low double digit revenue growth in Q2
• The Online Advertising division saw robust revenue growth of 23% in Q2
• Regulatory pressures remain although Tencent has fast been implementing remedial actions to appease authorities
• The long-term trend for Tencent remains down although a short-term rebound