Tencent Q4 Earnings Overview

Tencent reported Q4 financial results after the Hong Kong close. 2021 was described as a “challenging year” while the industry is going through an evolution, having focused on “zero-sum competition, aggressive marketing, reckless expansion, short-term growth, and corporate benefits, overlooking the most important elements of sustainable growth.” With this statement, the company is looking forward to a future of sustainable development for China's internet sector.

Advertising revenue was weak, as expected, driven by the regulation of industries such as private tutoring/education and the macroeconomy. Management expects this to improve in 2022. The company expects game releases in 2022 will pick up, though the company lacks clarity on timing from the regulator. Another factor is Tencent’s investment in private companies as “valuations have become more volatile” which is a bit of an understatement! Returning capital to shareholders is a priority through the JD.com spin-off this Friday, stock buyback, and dividends. 

The company is working with financial regulators to set up a financial holding company for its fintech unit. The company said it expects this to be a positive move.  One analyst asked if Tencent should break itself into multiple companies to avoid regulation.  Martin Lau dismissed the idea as I suspect that analyst’s questions won’t be taken in the future!  Tencent is a very well company with a strong management team.  They were quite conservative in their remarks which isn’t surprising.  Let’s hope that 2021’s challenges lead to a better 2022.

% changes are year over year, i.e. Q4 2020 to Q4 2021

• Revenues +8% to RMB 144.188B ($22.615B) from RMB 133.669B versus expectations of RMB 145.306B
• Revenue by Biz VAS RMB 79.913B from RMB 66.979, Online Advertising RMB 21.518B from RMB 24.655B, FinTech RMB 47.958B from RMB 38.494B
• Cost of Revenues +15% to RMB 86.371B from RMB 74.788B
• Monthly Active Users +3% to 1.268B
• Adjusted Operating Profit -13% to RMB 33.151B ($5.2B) from RMB 38 versus analyst expectations of 41.452B; Gross margin decreased to 40% from 44%
• Adjusted Net Income -25% to RMB 24.9B from RMB 29.203B
• Adjusted EPS was RMB 2.54 versus analyst expectations of RMB 3.07

In preparing for an interview yesterday, I wanted to look at the fundamentals of the China internet space.  I looked at the bigger names to get a sense of where things stood. Several stocks listed recently or have lacked earnings so there is no P/E for companies such as Kuaishou and until recently Pinduoduo. Take a look!

Company’s current and five year average of forward P/E, the difference in %, and number of standard deviations from that 5-year average

Key News

Asian equities had a strong day led by Hong Kong and Japan while India was off and Pakistan had a market holiday. The Hang Seng gained + 1.21% led by growth stocks/sectors such as internet stocks, tech, healthcare, and communication as the Hang Seng Tech +2.05%.  Volume increased +26.38% from yesterday, which is 118% of the 1-year average.  Good to see an up day on stronger volume as 3 stocks advanced for every 2 decliners.  Short selling volume was up from yesterday and remains elevated as there is clearly a battle between the bulls and the bears.  

The Hong Kong-listed internet stocks failed to rise as much as the Chinese internet ADRs’ US performance, which will lead to a pullback today in the US.  Yesterday’s US ADR performance was driven by the Reuters article that discussed how the CSRC told companies with US ADRs to prepare for more disclosures in order to comply with the Holding Foreign Companies Accountable Act.  Let’s hope the two sides can put this issue to bed!  Another factor for US ADRs will be Tencent’s underwhelming Q4 financial results discussed further below. 

Telecom equipment maker ZTE (763 HK) jumped +23.14% after a Texas court ended the company’s probation following its guilty plea on shipping equipment to Iran and North Korea back in 2017.  Healthcare had a strong day in Hong Kong +6.87% and China  +1.94% as China grapples with covid outbreaks.  The clean technology sector (EV, solar, wind) in both Hong Kong and China had a strong day on government commitments to developing hydrogen resources.

Shanghai gained +0.34%, Shenzhen gained +0.54%, and the STAR Board gained +0.86% on volume off -2.02% from yesterday which is 89% of the 1-year average as 1,931 stocks advanced while 2,352 stocks declined.  Similar to Hong Kong, growth stocks and sectors outperformed value stocks overnight.  Foreign investors trimmed mainland stocks by -$30mm via Northbound Stock Connect.  Treasury bonds were flat, CNY was off a touch versus the US $ and copper +0.03%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.37 versus 6.36 yesterday
• CNY/EUR 7.00 versus 7.00 yesterday
• Yield on 10-Year Government Bond 2.83% versus 2.83% yesterday
• Yield on 10-Year China Development Bank Bond 3.07% versus 3.08% yesterday
• Copper Price 0.03% overnight