3Q21 top-line growth softer than expected; impact of new regulations emerging

  • Tencent released its 3Q21 results yesterday; its top line was generally below market expectations partly due to a sharp slowdown in its advertising business. Fintech and business services were the top-line growth drivers.
  • We lowered our forecasts to reflect softer performance in the social network, games and online advertising segments.
  • The slowdown in turnover growth may continue to create selling pressure for Tencent, but this was somewhat expected by the market. Reiterate ADD with a new DCF-based target price of HK$520.3 (down from HK$528.1), as we factored in slower revenue growth, especially in 2022. Tencent shares may react positively if the Company resumes share buybacks, which may offer a short-term trading opportunity.

3Q21 results highlights

Tencent reported total revenue of Rmb142,368m in 3Q21, up 13% yoy, below our expectation of 20.3% yoy for full-year 2021. Its gross profit was 62,747% in 3Q21, up 11% yoy, below our expectation of 12.5% for full-year 2021. Its net profit was Rmb39,510m in 3Q21, up 3% yoy. The slower top- and bottom-line growth in 3Q21 may be a negative surprise to the market, but it was better than our expectations, as our 2021F forecast is lower than market expectations. The Company reported non-IFRS net profit of Rmb31,751m in 3Q21, up 3% yoy.

Fintech and business services drove 3Q21 performance

Tencent reported that its fintech and business services segment achieved strong growth in 3Q21. Regarding sub-segment performance in 3Q21: 1) Revenue from social networks increased 7% yoy to Rmb30.3bn, mainly due to relatively rapid growth in its video and music subscription services, as well as moderate growth in live-streaming and in-game item sales. 2) Revenue from games increased to Rmb54.2bn in 3Q21, mainly because of a 9% yoy increase in mobile game revenue, partly offset by a 1% yoy decrease in PC game revenue. 3) Revenue from online advertising grew 5% yoy to Rmb22.5bn in 3Q21, attributable mainly to an increase in social and others advertising revenue, which increased by 7% to Rmb19.0bn, because of advertising revenue growth in Weixin Mini Programs and Weixin Official Accounts; and media advertising revenue decreased by 4% yoy to Rmb3.5bn, due to lower advertising revenue from the Tencent News app. 4) Revenue from fintech and business services increased 30% yoy, to Rmb43.3bn in 3Q21, reflecting higher commercial payment volume, and digitalization of traditional industries and videolization of the Internet industry, as well as the consolidation of Bitauto’s Business Services revenue.

Key takeaways from the results conference call

During the post-results conference call, management shared its views on the metaverse, which management believes is an exciting concept but with lots of uncertainty. It is an addition to gaming and social networking, and offers a real opportunity, since Tencent’s strengths lie in its tech prowess and its social networking roots. Management believes Tencent’s gaming experience, and technology and engine capability (e.g. AI capability and the capability to build large server architecture) are the Company’s advantages in metaverse development. Management expects software applications to drive the overall metaverse and related hardware. Management also commented on online advertising; the education, game and insurance sectors were hit the most by the regulatory changes, as well as macro environment. Management expects future regulations and macro challenges to put pressure on its online advertising business in the next few quarters.