Tencent Q2 results aid Naspers and Prosus share price rebound
Tencent Holdings, whose largest shareholder is the JSE listed Prosus, has released Q2 2020 results which have come in ahead of analyst expectation
Some of the salient features of the results are as follows:
- Group revenue up 29% year on year (y/y)
- Online gaming revenue up 40% y/y
- Operating profit up 43% y/y
- Operating margin increased to 34% from 31% previously
Online gaming revenue which accounts for roughly a third of group sales were the stand out, although the social network, fintech and business services divisions all saw strong revenue growth of around 30% year on year as well. Online add revenue grew at 13% in the second quarter, less than half the pace of growth realized in the first quarter of the year.
At the beginning of August 2020, US president Donald Trump signed an executive order addressing Chinese owned and developed apps Wechat (Tencent owned) and TikTok (Bytedance owned), for what he deemed as threats to “national security, foreign policy, and economy of the United States”. The executive order will ban all transactions with these apps in the US. The order is to be executed 45 days after the initial announcement (6 August 2020).
The outcomes of such a ban for Tencent (Wechat) are difficult to assess. WeChat revenue form the US is a relatively small contributor to the group (3% to 5%), although Tencent has ties to many other companies in the worlds largest economy which could be compromised. Some of these companies within which Tencent has a significant or controlling stake in include, Snapchat, Universal Music, Spotify as well as a number of major gaming developers.
The impact on Tencent earnings the ban may have are about as clear as the US presidents executive order (which are vague). The Tencent share price still trades roughly 6% lower than it did when this news was released. The suggestion is that uncertainty will remain leading into the 21 September deadline, resolve could see a sharp rally in the Tencent share price, while failure thereto would see renewed decline.
Prosus & Naspers
Prosus NV (NL), recently unbundled from Naspers Ltd continues to have a 31% holding in Tencent. Naspers continues to hold more than 70% of Prosus NV. The fate of Naspers and Prosus valuations continue to be dominated by the appeal of Tencent holdings with little value being prescribed to these companies other business interests. While these shares have all been negatively impacted by the Trump executive order on WeChat, the news of a robust set of results from Tencent have aided a partial recovery in the companies as well.
Our preferred trading method on Naspers and Prosus remains a pair trade, the details of which can be located here.
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