Earnings First Take: Tencent (700 HK) – Core net profit declined by 23% in 1Q22, below market expectations
• Revenue was flat at Rmb135bn, below market expectations of 4% growth
• FinTech’s slow revenue growth of 10% is the key disappointment
• Gross profit decreased by 9%, with margin contracting by 4ppt y-o-y to 42%
• Non-IFRS net profit decreased by 23% to Rmb25.5bn, below market expectations of c.18% decline.
• Expect near-term share price pressure
What’s New
– Tencent (700 HK) announced its 1Q22 results on 18 May after HK market close.
– Revenue was flat at Rmb135bn, below market expectations of 4% growth
– Segment-wise, online game revenue was flat compared with 1Q21 at Rmb43.6bn. In terms of geographical performance, domestic game revenue decreased by 1% to Rmb33bn, while international game revenue grew by 4% to Rmb10.6bn. FinTech and business services (FBS) revenue increased by 10%, below consensus.
– Online ads revenue decreased by 18% to Rmb18bn, with social ads declined by 15%, while brand ads declining by 30%. The weak performance was mainly due to continued macro weakness.
– Gross profit decreased by 9% to Rmb57bn, with margin contracting by 4ppt y-o-y to 42%.
– Non-IFRS net profit decreased by 23% to Rmb25.5bn, below market expectations of c.18% decline.
Our View:
– We expect share price pressure in the near term.
– The slower-than-expected FBS growth was mainly caused by weak commercial payment volume due to the resurgence of Covid.
– The sluggish non-IFRS net profit was due to slower revenue growth, margin contraction and higher operating costs.
-We expect online game growth to resume in 2H22 after resumption of game approval in April, while overall growth will take time to speed up amid weak macro and Covid situation.
– We currently rate BUY with TP of HK$563 on the counter.