1Q22 results lower than expected; shifting to low gear in the near term
? Tencent’s 1Q22 results were lower than our and market expectations.
? Domestic online game revenue dropped 3% yoy, and overseas game revenue grew 8%
yoy (vs. 24% yoy in 4Q21). Performance of fintech and business services w as impacted
by macro headwinds (such as the COVID-19 outbreak) and the impact of regulations.
? We reiterate the view that 2022 w ill be challenging for the industry and for Tencent,
especially in 1H, given delays in the launch online game licenses and the
implementation of regulations in various segments.
? We lowered our net profit forecasts slightly for 2022F, 2023F and 2024F after the 1Q22
results announcement.
? The cut in net profit forecasts and management guidance is expected to put pressure
on Tencent shares in the near term. We still hold a constructive view on the Company,
as w e believe that its investments w ill translate into future growth and that the recent
message from Chinese government is turning more positive for the sector. Reiterate
ADD with a new DCF-based target price of HK$440.6 (down from HK$485.2). A nearterm catalyst would be the normalization of government policy and a pick-up in the
revenue growth rate.
1Q22 results highlights
Tencent reported total revenue of Rmb135,471m in 1Q22, flat yoy and down 6% qoq,
below market expectations. The impact of government policy and macro headwinds
(especially the COVID-19 outbreak) dragged down overall growth. Its gross profit was
Rmb57,074m in 1Q22, down 9% yoy, which in our view , w as dragged down by the softer-than-expected performance of the online game segment. Its net profit w as Rmb23,413m
in 1Q22, down 52% yoy. The Company reported non-IFRS net profit of Rmb25,545m in
1Q22, down 23% yoy.
Fintech and business services remained the driver for 1Q22 top-line growth
Despite the slow down in yoy revenue growth, Tencent’s fintech and business services
segment remained a growth driver and still achieved 10% yoy top-line grow thin 1Q22.
Regarding sub-segment performance in 1Q22: 1) Revenue from social networks increased
1% yoy to Rmb29.1bn, mainly due to an increase in revenue from Tencent’s video account
live-streaming services but largely offset by drop in revenue from its video and music
subscription services. 2) Revenue from games dropped about 2% yoy to Rmb40.3bn in
1Q22, mainly because of a 3% yoy decline in mobile game revenue and a 2% yoy increase
in PC game revenue. Domestic game revenue dropped 3% yoy in 1Q22 owing to the
government’s minor-protection measures to limit playing time for minors. Overseas
markets reported an 8% yoy increase in online game revenue in constant currency and a
slow down in overseas online game revenue, according to the Company, owing to the post-COVID normalization of spending by overseas gamers. 3) Revenue from online advertising
dropped 18% yoy in 1Q22, attributable mainly to softer advertising demand from verticals,
including education, Internet services and e-commerce. 4) Revenue from fintech and
business services increased 10% yoy in 1Q22, reflecting the impact of the COVID-19
outbreak. Business services revenue growth w as impacted by the Company’s strategy of
shifting the focus of its IaaS business to quality growth and reducing the number of loss –
making contracts.