Tencent Shares Plunge Further on Lackluster Profit Report

Shares in China’s Tencent Holdings have lost even further on Thursday after it reported its first quarterly profit decline in almost 13 years and said that it did not know when it would get Chinese approval to make money off of its most popular game.

Tencent name on its building

The lackluster earnings results have underscored the impact of a ban on a freeze on new China approvals for the gaming industry since March because of the restructuring of related regulatory agencies in the world’s biggest gaming market.

The company has reported a 2 percent decline in second quarter net profit as well as its slowest revenue growth in three years.  Tencent stated that the biggest hurdle to a return to rapid revenue growth was that it could not yet charge for the PlayerUnknown’s Battleground (PUBG) video game in China.

Shares in China’s biggest social media and gaming company slipped 3 percent, adding to a tumultuous slide earlier this week after its blockbuster game title “Monster Hunter: World” was pulled out in the country because of regulatory complaints.

Gaming revenue made up 40 percent of Tencent’s total revenue in the quarter.

China sports a complex approvals process for games.  While PUBG can be played as a free game, Tencent still awaits the green light to monetize the game.  PUBG is a popular battle game with over 400 million players worldwide developed by Tencent’s South Korean partner and investee company Bluehole.

Tencent was compelled to pull “Monster Hunter: World,” which has a user base from around the world, four days after its China launch.  Martin Lau, who is the company president, said during an earnings call on Wednesday that the content was not fully compliant, though he did not divulge any more information.

This isn’t the first time that Tencent games have received criticisms from regulators.  In July last year, China’s communist party mouthpiece, the People’s Daily, lambasted Tencent, describing “Honour of Kings” game as poison, calling for tighter regulatory controls of online games.

Even though many analysts have already moved to slash their target prices for Tencent’s stock this week, they were broadly optimistic about the firm’s longer term outlook.

“We consider the disruption to the game business to be temporary and primarily due to licensing suspension amid regulatory uncertainties, the business remains structurally intact, in our view,” said John Choi, who is a Daiwa Capital markets analyst.

Choi slashed his price target to HK$400 from HK$490, although he maintained his “buy” rating.

Fifteen analysts have already lowered their target price on Tencent since Wednesday.  The average price of 41 analysts dropped to HK$487.59, or lower 6 percent over a month, based on data.  However, this still remains well above Tencent’s share price of HK$326 during the Thursday afternoon trade.

“Fundamentally, the business is as strong as it has ever been, in our view, and management says that it is working on various initiatives to reinvigorate growth as soon as possible,” said Renaissance Capital in a research note.


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