Tencent: be patient, time will tell

By Bruce Liu
We are more optimistic about Tencent’s Q2 results than the market.
The bears can focus on slowing growth, the lukewarm ad outlook due to the crackdown on online education and regulatory headwinds for the gaming industry. We think most of these negativities are priced in and weigh more on sentiment than fundamentals.

First, while the regulatory headwinds are likely to continue, the real impact may be limited. 1) Teen players contribute only a fraction of gaming revenue. 2) The abolition of the special treated tax status can affect the tax rate of some subsidiaries only by a few percentages. 3) Tencent maintains higher industry standards regarding data security. 4) Profits do not come from commissions on SMEs or employees in the gig economy. All in all, the damage to the company’s foundations seems manageable. Tencent is also proactively responding to government initiatives to rebalance social welfare, thereby easing government regulatory burdens.

Second, revenue growth slowed, but partly due to a higher base effect. Gaming growth slowed after Covid, but international gaming revenue grew 37% (ex FX) higher than domestic gaming and now accounted for 25% of total gaming revenue. Fintech and business services maintained a high growth rate of 40%, demonstrating that Tencent is making smooth progress in its To-B business. The education sector crackdown could hit the online advertising industry. Still, the vacancy of the ads bought in the education sector may soon be filled by other sectors, as Tencent’s ad inventories are the most important spots.




The valuation has fallen to a record low, taking into account the most headwinds. We believe that China’s Internet industry will meet the new standard according to the new regulatory reality. Tencent will grow steadily and still be the face of China’s new economy and technological innovation.
Bruce Liu is the Chief Executive Officer at Esoterica Capital and Portfolio Manager of the Esoterica NextG Economy ETF (WUGI)

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