Chart of the Week: Tencent Still Driven by Gaming

March 26, 2021

With the recent regulatory crackdown on Chinese Internet giants, many of the most dominant technology stocks listed in Hong Kong have seen their share prices fall.

Among them is Tencent Holdings Ltd (SEHK: 700), the online gaming and WeChat messaging giant. Since peaking at an all-time high in late January at near HK$770 a share, Tencent shares now sit around 20% lower.

However, that hasn’t really had anything to do with its business performance. Rather it’s been a switch in focus by Chinese regulators from rival Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) towards Tencent.

Clearly, the two platform giants have been a victim of their own (astounding) success in that their dominance has now attracted attention.

Amid these moves, investors could have missed that Tencent reported a solid set of fourth-quarter and full-year 2020 earnings earlier this week.

Gaming proves to be the moneymaker

With Tencent’s long tentacles in many different parts of the Chinese economy – from payments to food delivery to video streaming – long-term investors would do well to remember how its key “core” gaming business is performing.

And on that front, it seems to be business as usual (i.e. very healthy). In the fourth quarter, year-on-year growth of its gaming business reached 29% as it posted RMB 39.1 billion (US$6 billion) in revenue (see below).

Meanwhile, on a full-year basis the 36% year-on-year growth of its gaming division was impressive. Part of the Value Added Services (VAS) business unit, gaming and Tencent’s social network revenue together still make up about 55% of overall revenue.

For long-term investors, the gaming business is growing at a solid pace. It’s Tencent’s Fintech and Business Services unit which will face more scrutiny from Chinese regulators (given the dominance of WeChat Pay and AliPay).

In that sense, anyone perhaps looking for “value” and thinking this crackdown could eventually blow over, Tencent shares look like a good deal right now.

Source: Tencent Q4 2020 and full-year 2020 earnings presentation

Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Alibaba Group Holding Ltd.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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