Challenges and opportunities for Tencent

Tencent recently announced its Quarterly earnings and overall still was a good result though the markets reacted negatively .

Tencent Revenue stream analysis

Tencent’s overall business can be divided into 4 broad areas :

• Social Media
• Gaming
• Advertising
• Financial Services & Business services

Source : Tencent’s Earnings Report , Bloomberg

Social Media ( Growth rate YoY 21%) and Financial services ( Growth rate YoY -36% ) are still growing healthily.

The challenge is Gaming and Advertising where growth has declined to 11 % and 13% respectively.

The Tencent earnings  result was being closely watched not just by Analysts but overall observers to predict how the broader markets will move from here given that both S&P and NASDAQ are at their peaks

Sector Outlook

• Financial services – Tencent is perfectly poised and there may be good growth with Webank and Wepay growth acceleration esp in international markets
• Advertising will be more competitive as we see new players like Tiktok emerging which are taking the digital spend .
• Gaming – The focus will be on internationalization and expanding to overseas markets . Now this will need to be seen wrt how successful and how fast they can do this.

Impact from trade relations/regulations

For Financial & Business services which is the highest growing  we will see some pressure with the trade tensions. This may be in the form of regulation/other impacts.

Future Risks

Internationalizing Gaming will be a challenge . The approach Tencent is taking is Business cooperation/investments with 8 out of Top gaming cos like Activision , EA, Nintendo etc. But the global markets will be more dynamic ..

Advertising will be under severe pressure as platforms like Tiktok become more aggressive and we see a bit more rationalization by media agencies/corporate on their overall digital spend.

Last thoughts

Break up of the gaming business/Fintech business  in future. We are already seeing this in other markets e.g  Flipkart is planning to siphon off PhonePe its Payment division which is standalone receiving a Valuation of 10 Bn USD+.

So there may be a greater call to break up as the SOTP ( Sum of the Parts ) may be able to attract better value than the overall group.

The full interview can be seen on

https://www.bloomberg.com/news/videos/2019-11-14/tencent-earnings-the-bright-spots-and-challenges-for-the-company-video

Sources

https://www.tencent.com/attachments/ResultsPresentation3Q19.pdf

https://ajaysunder.com/blog/