Tencent share price reverses near-term downtrend despite drop in revenue and earnings
Stalwart of the Naspers and Prosus investment stable, Tencent Holdings, sees traders and investors looking past lackluster quarterly results as shares rally on the news.
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 18th 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.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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