Tencent’s Earnings Are a Bad Omen for Chinese Tech

A regulatory crackdown, China’s slowing economy and a nasty post-Covid hangover created the weakest revenue growth ever for China’s most valuable internet company. Country in the previous quarter. The stock has been falling in price over the past 18 months. Stocks can stay alive for quite a long time.

Tencent’s revenue for the quarter ended March was not flat from a year earlier and fell short of consensus estimates on S&P Global Market Intelligence. Profit margins also fell: Adjusted operating profit for the quarter fell 15% year over year.

The company’s core gaming business is lackluster. Domestic game revenue fell 1% last quarter from a year earlier. The company said that the measures recently implemented to protect young gamers in China have directly and indirectly impacted the number of paying users. China lifted a nine-month ban on gaming license approvals last month, but scrutiny is likely to remain tighter than before.

Even Tencent’s international games business, which has been a bright spot for the past few quarters, posted revenue growth of only 4%. The outbreak from the pandemic is fading rapidly as more countries return to more normal mobility and consumption patterns. Tencent’s revenue for international games grew 31% in 2021.

Tencent’s advertising business was hit the hardest: Revenue there fell 18 percent year-over-year. China’s crackdown on after-school tutoring companies in the middle of last year has taken a toll. Such companies were big customers of online advertising, but their businesses essentially evaporated overnight. Advertising for other internet services and e-commerce also decreased. And a slowing economy combined with tighter regulation of online advertising could mean tougher days to come. The segment’s gross margin was 37% last quarter, compared with 45% a year earlier.

Shares of Tencent have halved in value since their peak in January last year, taking away $440 billion in market value. Shares rebounded from their March lows – along with other Chinese tech stocks – following more supportive messages from Beijing to the industry and the market.

There is no doubt that the growth period of China’s consumer technology industry is over. What remains unclear is what the new normal will actually look like, now that the period of the most intense Beijing-regulatory storms seems to have passed.

When stocks fall too much, investors with longer time horizons may be tempted to jump in. But until Tencent can demonstrate its ability to thrive again in this brave new world of Chinese tech, it may be wiser to stay out – especially for Chinese consumers in general. still in such a bad mood.

Write letter for Jacky Wong at jacky.wong@wsj.com

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https://www.wsj.com/articles/tencents-earnings-are-a-bad-omen-for-chinese-tech-11652876650?mod=rss_markets_main Tencent’s Earnings Are a Bad Omen for Chinese Tech

Edmund DeMarche

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