Tencent is running out of excuses for gaming woes

NetEase

21/03/2024 11:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Robyn Mak
       HONG KONG, March 21 (Reuters Breakingviews) - Tencent
 0700.HK  is being outplayed. Revenue is shrinking in its core
video gaming business in China and overseas. The $350 billion
Shenzhen-based company founded by Pony Ma admits it needs to get
its "own house in order". That looks increasingly urgent.
    The lucrative division remains the company's crown jewel,
accounting for over a quarter of its top line. Yet Beijing's
years-long regulatory assault on the sector, including imposing
curbs on how much time and money minors can spend online, has
taken its toll. 
    Tencent has suffered from weak growth before. Total group
revenue contracted for the first time in 2022 by a small amount.
The company then returned to growth, thanks to advertising,
fintech and other units. But the disappointing fourth quarter it
reported on Wednesday in its domestic and international gaming
division is troubling. 
    At home, where Beijing's crackdowns have eased, Tencent
President Martin Lau partly blamed the slowdown on zealous
gamers spending their money on titles in the first quarter last
year, according to Reuters. On a separate call with analysts, he
elaborated that "monetisation has temporarily stagnated" at the
company's two biggest titles "Honour of Kings" and "Peacekeeper
Elite". The company's 3% year-on-year fall in gaming revenue
within the People's Republic, to 27 billion yuan ($3.75
billion), is a far cry from smaller rival NetEase  9999.HK ,
which reported a 29% jump in mobile games sales over the same
period.  
    Tencent's global expansion has also hit a speed bump, with
revenue falling 1% excluding currency fluctuations. Back in
2022, the company blamed "a post pandemic digestion period";
this time, it cryptically said its Supercell subsidiary, which
Tencent bought eight years ago in a $8.6 billion deal, was
"repositioning" its games.
    The company pledged to "at least double the size" of share
buybacks this year to $12.8 billion. It also committed to
overhauling leadership for some games and focusing on big-budget
titles. 
    Shares of Tencent were up as much as 3% on Thursday. Still,
the Hong Kong stock is down over 10% in the past year. It is
underperforming NetEase's U.S.-shares that have surged by a
quarter and trade on 14 times forecast next 12 months earnings,
per LSEG data, slightly above Tencent. The company needs new
hits, and fast.
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    CONTEXT NEWS
    Tencent on March 20 reported revenue of 155 billion yuan 
($21.6 billion) in the three months to end-December, an increase
of 7% from the same quarter a year earlier.
    Domestic gaming revenue fell 3% year-on-year to 27 billion
yuan, while international gaming revenue increased 1% to 13.9
billion yuan, or declined by 1% excluding currency fluctuations.
    The company pledged to "at least double the size" of its
share repurchases year-on-year to over HK$100 billion ($12.8
billion) in 2024. 
    In a call with media, Tencent president Martin Lau said the
company saw a slowdown in gaming revenue last quarter partly
because many zealous gamers had already spent on their games in
the first quarter last year when China moved to lift all
Covid-19 restrictions.
    In a separate call with analysts, Chief Strategy Officer
James Mitchell responded to a question on gaming growth by
concluding "we believe that the key challenge for us is just
getting our own house in order."
    Shares of Tencent were up 2.6% during late morning in Hong
Kong to HK$296.20 on March 21.


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Graphic: Tencent stock is lagging its gaming rival    https://reut.rs/3IMkxnG
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 (Editing by Una Galani and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  MAK/   
robyn.mak@thomsonreuters.com; Reuters Messaging:
robyn.mak.thomsonreuters.com@reuters.net))