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Tencent Holdings (SEHK:700) reported fourth-quarter earnings on March 21st that missed consensus estimates. The bottom line fell short with net income during the quarter slumping over 30% to RMB 14.2 billion – its largest miss in over a decade.
Despite this, top-line growth beat expectations with revenue surging 28% to RMB 84.9 billion. So what’s in store for China’s WeChat operator and gaming giant? Here are three things investors should look out for in 2019.
1. Gaming approvals set to resume
Online gaming revenue growth was flat year-on-year in the fourth quarter. It’s well-known that Tencent derives the majority of its revenue from online games and the Chinese government’s freeze last year on game approvals eligible for monetization battered its stock price. Tencent shares fell from a high of HK$470 in early January 2018 to a low of around HK$250 in October of last year. However, the government resumed game approvals in December 2018 and Tencent received its first long-awaited approval, following the freeze, in January this year.
With the highly-popular Battle Royale-style game PUBG (which Tencent is distributing in China), proving a massive hit with users analysts believe it is only a matter of “when” not “if” it can get regulatory approval to monetize this and other games in the pipeline. So far this year, it has had eight titles approved and a pickup in gaming revenue throughout the rest of 2019 should follow.
2. The growth of the cloud and online advertising
Two of Tencent’s fastest-growing businesses have been its cloud computing and online advertising divisions. In the computing cloud, it is starting to up its game and poses a serious challenge to the number one vendor in China: Alibaba. Its cloud business in 2018 saw revenue increase by over 100% year-on-year to RMB9.1 billion while paying customers doubled year-on-year during the fourth quarter.
Meanwhile, it is leveraging its ubiquitous messaging app WeChat, with its user base reaching 1.1 billion users in the fourth quarter, to better serve up ads in its Moments feed and Mini Programs. In the fourth quarter of 2018, it raked in RMB 17.2 billion in revenue from online advertising, a robust 38% increase year-on-year. When you compare this to its online ads business in the fourth quarter of 2014 (when it generated just RMB 2.6 billion) it becomes clear how far the company has come and how much further room there is to grow in this area.
3. Strategic move to the Industrial Internet
Tencent Chairman and CEO Pony Ma justified a recent company reorganization by stating in an open letter in November 2018 that:
“We believe that the first stage of the mobile internet, the consumer internet, is drawing to a close and the second stage, the industrial internet, is kicking off. It became clear to us that if objects and services are not fully digitalised, the connection between them and people cannot be improved.”
This reorganization was in large part done to position the company to take advantage of the opportunities the Industrial Internet offers, in areas such as cloud computing or the Internet of Things (IoT). Tencent is now looking to leverage its own insights in the consumer internet space to succeed in this hyper-competitive space. Investors should be on the lookout for any further developments in Tencent’s Industrial Internet strategy in 2019 as this could play a determining factor in its future growth.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Tim Phillips owns shares of Tencent.