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Tencent Posts First-Ever Revenue Drop

Plus500 | Thursday 18 August 2022

The world’s most populous nation has been facing a serious confluence of economic headwinds in recent months. Tencent, a Chinese entertainment and technology conglomerate specialising in gaming and multimedia, revealed an unprecedented quarterly revenue drop to the wider public on Wednesday. This showed that the difficulties with which the Chinese economy as a whole has been forced to grapple have not spared the domestic technology industry.

Tencent Share Drop

Tencent’s Dubious Milestone

Tencent (0700.HK), one of the most renowned names in the Chinese tech sector, may have showed yesterday the extent to which the country’s economic slowdown has affected the firm’s bottom line. For the very first time since Tencent’s initial public offering (IPO) in 2004, revenues for Q2 2022 showed a fall. When compared to the equivalent figure for the second quarter of 2021, the company’s revenue fell by 3% to under $19.8 billion. 

Tencent executives attributed their quarterly results’ undershooting analyst estimates to a combination of factors. China’s economy across all sectors has been struggling to maintain stability so far in 2022 as a resurgence of the novel coronavirus led the government to impose strict lockdowns on major urban centres. These containment measures, part and parcel of the Chinese Communist Party’s stated ‘Zero Covid’ policy, had deleterious effects on business activity from Shanghai on the nation’s eastern coast to the manufacturing hub of Shenzhen in the Pearl River Delta, where Tencent is based. The strain felt across the Chinese marketplace could be partially responsible for the 18% drop in advertising revenue reported by Tencent yesterday. (Source:CNBC)

A further, tech-specific, depressive factor that may have contributed to the drop in revenue is the Chinese government’s regulatory crackdown. For the past nearly two years, the raft of laws according to which gaming companies in China must operate has been growing; restrictions limiting the amount of time minors are allowed to devote to video games may have proven a significant drag on Tencent’s customer base. In addition, Chinese regulatory bodies have not granted licensing approval to any of the firm’s new games in months.(Source:Bloomberg)

Major Market Doldrums

Much ink has been spilled in recent months on China’s economic issues. While much of the industrialised world has been dealing with sky-high inflation rates, leading to rapid cycles of interest rate hikes instituted by central banks, China’s economic growth has been relatively low. The nation’s gross domestic product (GDP) showed a 2.6% drop in the second quarter of this year, most likely due, in large part, to COVID-19 lockdowns. In the face of these figures, China’s central bank moved on Monday to lower interest rates in an effort to prop up domestic demand, in stark contrast to the monetary policy environment prevalent in the United States at the moment. (Source:The Washington Post)

Any potential recovery on the part of Tencent from yesterday’s lacklustre revenue figures could rest on where the Chinese economy as a whole heads in the near term. However, the horizon is not devoid of any light for the country’s most valuable firm; Tencent has indicated that major cost-cutting measures are on the agenda. The company apparently plans to sell off its $24 billion stake in tech industry peer Meituan (0690.HK) later this year, which could free up a significant sum. In addition, the short-form video platform Tencent has been developing on its proprietary WeChat platform could prove, in the fullness of time, an important new source of advertising revenue.

That being said, it is still unclear how much of the almost 32% drop in share value seen so far in 2022 Tencent will be able to recoup in the coming months. With volatility still the name of the game on global Indices at the moment, the unknowns are still too great in number.

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