Tencent Holdings (0700:HK) has not done well ever since it hit a high of HK$757 in February 2021. It fell as much as 60% to a recent low of HK$297 before rebounding as the Chinese government vow to stabilise financial markets.
As the largest internet company in China, it has been hit by almost every single facet of the widespread tech sector regulatory crackdown as it has investments in almost every single segment of the internet industry.
Tencent’s FY21 financial results
| P&L in RMB’m | FY21 | FY20 | FY19 | FY18 | Variance (%) | Variance (%) |
|---|---|---|---|---|---|---|
| EPS in RMB’$ | FY21 vs FY20 | FY21 vs FY19 | ||||
| Total Revenue | 560,118 | 482,064 | 377,289 | 312,694 | 16.20% | 48.50% |
| Non-IFRS operating profit | 159,539 | 149,404 | 114,601 | 92,481 | 6.80% | 39.20% |
| Non-IFRS net profit | 123,788 | 122,742 | 94,351 | 77,469 | 0.90% | 31.20% |
| Non-IFRS EPS | 12.7 | 12.69 | 9.73 | 8.1 | 0.10% | 30.50% |
| IFRS operating profit | 271,620 | 184,237 | 118,694 | 97,648 | 47.40% | 128.80% |
| IFRS net profit | 227,810 | 160,125 | 93,310 | 78,719 | 42.30% | 144.10% |
| IFRS EPS | 23.16 | 16.52 | 9.64 | 8.23 | 40.20% | 140.20% |
| Dividend per share (HKD) | 1.6 | 1.6 | 1.2 | 1 | 0.00% | 33.30% |
| Key Metrics: | ||||||
| MAU of Weixin and WeChat | 1,268.20 | 1,225.00 | 1,164.80 | 1,097.60 | 3.50% | 8.90% |
| Mobile device MAU of QQ | 552.1 | 594.9 | 647 | 669.8 | -7.20% | -14.70% |
| Fee-based VAS registered subscriptions | 263.3 | 219.5 | 180.1 | 160.3 | 20.00% | 46.20% |
Source: Author’s compilation
Tencent delivered slower growth in FY21 results as 2021 was a challenging year in which the company had to embrace changes and implement measures required by the various regulatory bodies.
On a FY basis, Total Revenue increased by 16% while non-IFRS operating profit increased by 7%. 1H21 revenue growth was 23% while non-IFRS operating profit growth was 17%. This meant that 2H21 saw single digit revenue growth with a slight decrease in non-IFRS operating profits.
On a FY basis, while there was higher revenues across all segments, it was mainly due to the FinTech and Business Services segment which saw a 34% growth while the Value Added Services (VAS) and Online Advertising segment saw a 10% and 8% growth respectively.
IFRS EPS and operating profit increased by 40% and 47% respectively, mainly due to the higher net fair value gains on investees from RMB57.1 billion in FY20 to RMB 149.5 billion in 2021. This was mainly due to a RMB78.0 gain from the investment in JD.COM as the investment was accounted for at fair value when the distribution in specie was declared.
Non-IFRS operating profit and EPS which mainly excludes book value adjustments and share based compensation saw a 7% and 1% increase respectively. The increase in EPS was lower than the increase in operating profit as the Tencent recorded losses in its associates and joint venture as compared to a profit in the previous year. This was mainly due to increased spend in community retail initiatives and transportation services.
Final dividend per share for FY21 was HKD1.60, in line with FY20. However, in December 2021, there was a distribution in specie of 1 JD.COM shares for every 21 Tencent shares.
Tencent’s 2022 guidance
Tencent believes the China Internet industry is structurally shifting to a healthier mode characterised by a re-focus on user value, technology innovation, and social responsibility. The company is proactively adapting to the new environment by managing costs, increasing efficiency, sharpening focus on key strategic areas, and repositioning for sustainable long-term growth.
Tencent saw its proactive and industry-leading efforts in restricting time spent and spending by minors yield effective results. In the fourth quarter of 2021, total time spent by Minors reduced by 88% year-on-year, and contributed 0.9% of the total time spent on our Domestic Games. Total grossing receipts from Minors reduced by 73% year-on-year and contributed 1.5% of the total grossing receipts of the Domestic Games subsegment.
Looking ahead, Tencent expects to fully digest the impact of Minor protection measures in the second half of 2022 and will benefit from more new game launches when there are new releases of game licenses.
Tencent also expects its advertising business to resume growth in late 2022, as the company adapts to the new environment and further upgrade its advertising solutions.
There was also higher share-based compensation expenses, reflecting unusually intense competition for talent in 2020 and 2021, which Tencent expects to moderate in 2022.
3 Positive takeaways
1) Strong growth in the FinTech and Other business Services segment
This segment includes WeChat, Cloud and enterprise SaaS amongst other businesses. FinTech Services revenue growth primarily reflected increasing commercial payment volume. Business Services revenues increased rapidly year-on-year, due to digitalisation of traditional industries and continued growth of the Internet industry.
Tencent had to strengthening its payment ecosystem by enhancing user security, upgrading transaction and customer management functions for SMEs, as well as reducing merchants’ transaction friction via tools such as Weixin Pay Score. Tencent also supports digital yuan as an additional funding option within Weixin Pay, as part of the PBOC’s digital yuan pilot phase. This will position Tencent’s FinTech segment for further growth. Other businessse such as Cloud and Enterprise SaaS is also expected to continue on its growth trajectory.
2) Strong revenue performance in the international games subsegment
Despite the consensus expectation of a drag on gaming revenue growths due to the reopening plans by many countries into a post-pandemic future, International Games revenues grew by 31%, due to robust performance of games including PUBG Mobile, Valorant, Brawl Stars and Clash of Clans.
Among international mobile games, Tencent developed and operate 5 out of the top 10 titles. League of Legends’ animated series, Arcane, topped Netflix’s English-language TV series viewership chart during the week following its release. League of Legends World Championship consolidated its leadership as the world’s most popular eSports tournament, attracting a record-high of approximately 74 million peak concurrent viewers for its Finals. Clash Royale released one of the biggest updates in its history, boosting daily active users and grossing receipts.
3) Tencent’s strong portfolio of investments
Tencent recorded net investment gains of RMB 149.5 billion in 2021 as compared to RMB 57.1 billion in FY20. Excluding the gain from JD.COM mentioned above, net investment gains was RMB71.5 billion, 25% higher than FY20. This attests to Tencent’s management ability to make strong investments that are able to deliver strong financial outlooks in the current business environment.
3 Negative Takeaways
1) Slowing growth in domestic gaming and advertising revenue
The Domestic Games subsegment saw revenues grow by 6%, significantly lower when compared to the international games sub segment. The measures implemented for the protection of Minors within the Domestic Games subsegment impacted revenue growth directly as Minors spent less and indirectly as the company had to focus resources on implementation of new measures.
Revenues from Online Advertising increased by 8%, with strong growth witnessed in the early half of the year, followed by significant slowdown and then decline in the latter half of the year as advertisers adapted to the new economic and regulatory environment, particularly in 2H21. The full year revenue growth reflected the relative resilience of the consumer staples category, partly offset by headwinds from regulatory changes in advertiser categories including education, property and insurance, as well as by regulatory measures on the online advertising industry itself, such as limitations on launch screen advertisements.
While there is hope of a turnaround in second half of 2022, it is all not certain yet.
2) Lingering concerns Tencent’s payment overhaul and license requirements
After months of compliance initiatives by various Chinese regulatory authorities, the Chinese authorities are considering requiring Tencent to include WeChat Pay in a newly created financial holding company, part of an overhaul that may necessitate a new licence for WeChat Pay. A financial holding company would mean additional capital requirements and tighter regulatory scrutiny.
Similar to requirements imposed on Alibaba’s Ant Financial, Tencent needs to place its banking, securities, insurance and credit-scoring services into a financial holding company that can be regulated like a traditional bank. Regulators are now weighing whether WeChat Pay should be included in that holding company and operate separately from the main social media arm.
3) Is it time to pay the piper of common prosperity?
Since Tencent pledged RMB 100 billion to the common prosperity theme in August 2021 saying that half of the funds would be used for sustainable social value innovation, and the rest would go into social charity programs to contribute to common prosperity, there has not been news of large spending yet. Hence, spending will probably ramp up especially in 2022 where China has a tough GDP growth target.
This common prosperity cost is separate from COVID-19 support measures such as reduction of transaction fees for WeChat payments for small and medium-sized merchants and reduction of technology service fee by Meituan for merchants in pandemic hit regions. With parts of China currently in another COVID-19 lockdown, it is likely that Tencent has rolled out further such initiatives to support the local businesses.
What’s next for Tencent?
Tencent closed trading at HK$393 before the results were released, about 48% below the all time high of HK$757, with its share price falling by about 32% since July 2021, which was arguably the point where the issues surrounding the internet platform sector accelerated.
Tencent’s FY2021 results were mixed, while there was overall growth in 2021, it was clear that the full year performance was mainly due to a strong 1H21 as 2H21 slowed down due to the issues mentioned. The management of Tencent must also be applauded for their ability to make quality investments as Tencent delivered overall gains on its investment portfolio despite the challenging times.
Tencent provided a carefully worded 2022 guidance emphasising the structural shift of the China Internet Industry into a healthier mode with a re-focus on user value, technology innovation and social responsibility. The company expects to also focus on costs and increasing efficiency as it only sees new game launches and advertising business growth later in the year.
As Tencent is an internet conglomerate with investments in almost every segment of the Chinese internet industry, every regulatory action will inevitably affect Tencent. Hence it is clear that Tencent will continue to toe the line and be at the forefront of any regulatory change so as to be in a strong position to manage any potential fallout.
With Chinese Vice-Premier Liu He’s recent statement to regulators to adopt a standardised, transparent, and predictable approach in overseeing the nation’s internet services giants, marking the first clear signal from Beijing that another turbulent year of crackdowns is not on the cards for Big Tech companies in 2022, this could mean that the company will need to spend less efforts on compliance and be able to devote more of its resources on growth.
Given the current positive Chinese sentiments, the stock may see some further recovery after the market digests the weak 2H21 performance. However, the stock is unlikely to recover to its all time high levels for now as this may require a lot more stability and resolution in terms of the internet sector crackdown so that the Tencent and the entire sector can focus on achieving stronger growth.
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