By Francois Strydom, Momentum Securities Portfolio Manager.
Despite the short term technical considerations, Tencent is fundamentally a good long term buy, and not all games.
Negative news and trade tensions
Regulatory concerns from the Chinese authorities on its online gaming segment has been sighted as a large contributing factor to the decline in Tencent’s share price, although the gaming segment only accounted for 34% of revenue as stated in its recent quarterly results.
Tencent’s earnings have been revised downwards for the 2018 and 2019 financial year by 9% and 12% respectively, which is expected given the major regulatory risks it faces in its gaming division.
The share is trading at 5 year lows on a 1 year forward earnings multiple, meaning that despite the downgrades in earnings expectations for the next two years, the share price movement is now providing us with a cheaper entry point than we’ve seen in the last five years. Even on an historical earnings multiple, the share price is trading at a 5-year low.
Management showing initiative to cast light on Tencent’s major growth contributors in future – in doing so also taking responsibility in the social media experience and remaining relevant in the digital age of cloud computing and AI:
At the beginning of the month, Pony Ma announced an initiative to consolidate its mobile internet (Tencent Browser), online media (Video and News), and social media (QQ, WeChat) businesses into one segment – effectively consolidating the management of its entire social media and internet content offering into one easy to manage segment. Social network revenue alone grew 30% y-o-y in the last quarter.
Some of the remaining business will also be cut and diced to allow a clear focus for Tencent’s Cloud and AI offering – The Cloud and Smart Industries Group, which basically looks to deploy its cloud computing and artificial intelligence products to corporates in various sectors, seeks to enable corporates to use cloud services and AI as effectively as possible.
Cloud services revenue doubled y-o-y in the last quarter. This is also a key theme in our portfolio with the likes of Amazon Web Services and Microsoft’s Azure already playing major roles in our exposure to the cloud computing theme – we see Tencent as a healthy addition to this theme, albeit in a diversified revenue form like Amazon and Microsoft.
Finally, to streamline and monetize its advertising potential even further, the advertising sales department across the group will be combined to provide a better servicing model for advertisers going forward. Advertising revenue grew 39% y-o-y in the last quarter.
This restructure should provide focus across the group and ensure that Tencent remains relevant in the ever evolving internet era.