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Tencent Sees the Best Run-up Prior to Earnings Release in Years

Sofia Horta e Costa
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Tencent Sees the Best Run-up Prior to Earnings Release in Years

(Bloomberg) -- Equity investors haven’t been this upbeat before Tencent Holdings Ltd.’s numbers in years, even though analysts are calling for the biggest profit slump in more than a decade.

The most valuable stock in Asia has added 3.2 percent in the past week, the best run-up prior to any release since its 2017 first-quarter update, according to data compiled by Bloomberg. The Chinese Internet giant, which is only just recovering from one of its darkest periods, will report results after Thursday’s close of trading in Hong Kong.

Recent bright spots include the resilience of its “Honor of Kings” title as well as its ability to keep making money from advertising, cloud services and payments. The danger is that investors have turned too optimistic before anything fundamentally changes: the shares have rallied 47 percent since a low in October, adding more than $140 billion in value.

“Investors have looked beyond 4Q results,” Citigroup Inc. analysts led by Alicia Yap wrote in a note dated Tuesday. The bank has a buy rating on Tencent and a price target that implies a 12 percent rally in the next year. “Any positive comment or outlook from management during the call could be viewed as upside risk.”

The bad news just kept coming for Tencent in 2018, starting when one of its oldest shareholders unloaded a huge stake. That was followed by a wave of selling from Chinese investors, global concerns over frothy tech valuations and slowing Chinese growth. But perhaps the biggest challenge of all has been a regulatory bottleneck on game approvals in China, Tencent’s core business.

China finally restarted doling out gaming licenses late last year, and gave the green light to some of Tencent’s more minor titles in January and February. But the damage was done: Citigroup estimates PC gaming revenue slumped 13 percent in the three months through December from the prior quarter, while smartphone gaming sales fell 3 percent.

Almost every Tencent analyst is bullish, and some turned more bullish as the stock rebounded. Sinolink Securities Co.’s Pei Pei bucks the trend, downgrading the shares two weeks ago and warning that there’s too much optimism priced into the stock. Tencent is still grappling with a mobile-games shortage, sluggish advertising demand and rising costs, which means all of its main businesses will remain under pressure this year, the analyst wrote.

Analysts predict net income fell 16 percent in the fourth quarter from a year earlier, the steepest decline since 2005. Revenue growth probably picked up to 26 percent after slowing for four consecutive quarters, according to the average estimate compiled by Bloomberg. Tempered expectations mean Tencent has a low bar to beat this earnings season, which helped the shares surge almost 6 percent after the last update in November.

4Q 2018 ESTIMATES:

Profit margin: 22.6 percentRevenue: 83.4 billion yuanNet income (GAAP): 17.5 billion yuanEarnings-per-share: 1.83 yuanTiming: Release after market March 21, conference call at 8 p.m. in Hong Kong: webcast link

--With assistance from Lulu Yilun Chen.

To contact the reporter on this story: Sofia Horta e Costa in Hong Kong at shortaecosta@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, David Watkins, Magdalene Fung

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