technology

Down $78 Billion in Value, Tencent Faces Worst Margins Ever

Updated on
  • Profitability predicted to drop to lowest level since 2003
  • Spending has increased amid competition with rival Alibaba
Tencent's Value Down $78 Billion

After the giddy heights of January when its shares hit an all-time high, Tencent Holdings Ltd. has shed $78 billion in value as investors price in the costs of the Internet giant’s massive spending spree.

Results on Wednesday are expected to show that rising costs and investments will hurt profitability at Asia’s biggest listed company. While Tencent has said sacrificing margins in the short-term is necessary to anchor future growth, analysts are concerned that the company isn’t yet able to make enough money from its mobile games to offset a decline in the desktop unit, its most profitable platform.

Shenzhen-based Tencent has been expanding into new businesses such as cloud computing and paying for fresh content, a strategy that contributed to a 72 percent surge in costs in the fourth quarter. Analysts predict gross margin in the latest period dipped below 47 percent for the first time since 2003, the earliest figures available, according to the average of 11 estimates compiled by Bloomberg.

Margin Meltdown

Tencent's profitability has been falling since 2015

Data: Bloomberg

While they remain bullish on the stock, Citigroup Inc. and Deutsche Bank AG are among brokerages that have lowered their sales or earnings expectations in 2018.

“The short-term weak performance in PC games coupled with larger payment-related subsidies and weaker ad seasonality may affect the company’s margin,” China International Capital Corp. analyst Natalie Yue Wu wrote in a May 8 note. “We see a period of share price weakness due to game business.”

Shares of Tencent have slipped 13 percent since its high on Jan. 23, declining more than three times as much as Hong Kong’s benchmark index. Tencent rose for a fifth day on Monday, following tech gains in Hong Kong and China after U.S. President Donald Trump’s reversal on ZTE Corp.

Tencent ramped up spending this year as it competes with e-commerce rival Alibaba Group Holding Ltd. on most fronts, including online entertainment, payments, cloud computing and even retail, Alibaba’s home turf. Tencent’s retail-related deals this year include its backing of Carrefour SA’s China unit and leading a $5.4 billion investment in Wanda Commercial Properties Co. It’s also been pumping money into its hottest online games, and fending off competitors in the mobile-streaming and content business.

Read BI’s preview of Tencent’s first quarter report

The battle has been a drag on margins at both Chinese companies. For Tencent, a stake sale from a major holder and a decline in the shares of some of its largest investments have put more pressure on the stock.

The options market is implying a daily move of 2.4 percent either way after the results, which would be the biggest earnings-day reaction in more than two years.

1Q 2018 ESTIMATES:

  • Gross margin: 46.96 percent (11 estimates)
  • Revenue: 70.77 billion yuan (15 estimates)
  • Net income (GAAP): 17.74 billion yuan (11 estimates)
  • Operating profit: 22.66 billion yuan (13 estimates)
  • Timing: Release after market May 16, conference call at 8 p.m. in Hong Kong: details
(Updates with Monday’s close throughout.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE