Tencent Holdings Limited (TCEHY)

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Tencent’s Sales Rebound Though Concerns Persist on China Outlook
By: Zheping Huang | May 18, 2023

Tencent Holdings Ltd. posted its fastest pace of revenue growth in more than a year but earnings missed estimates, reflecting an uneven internet sector recovery during China’s post-pandemic reopening.

China’s most valuable company grew online advertising by 17% as a gradual resumption of marketing fuels the business for sector leaders including Baidu Inc. Yet analysts had projected a sharper bounceback as the world’s No. 2 economy let down years of Covid Zero barriers. Tencent’s shares slid as much as 3.9% in Hong Kong.

Investors remain cautious after a year during which Tencent and its peers barely grew after regulatory crackdowns and Covid restrictions choked off the consumer and corporate spending. Mainstay internet businesses like advertising and gaming are only now emerging from their historic trough, while big tech firms have been forced to push aggressive cost cuts to endure an uncertain macroeconomic environment.

To revitalize the business, Tencent aims to integrate artificial intelligence capabilities across its suite of products from WeChat to online media, calling the technology a “growth multiplier.” ChatGPT, now a global phenomenon, triggered a race among Chinese tech firms to catch up. But the Shenzhen-based firm appears to lag behind rivals like Alibaba Group Holding Ltd. and Baidu, both of which have announced ChatGPT-style platforms and triggered a frenzy among investors.

President Martin Lau joined a number of technology executives — including OpenAI’s Sam Altman — in publicly welcoming regulation of the burgeoning space, in China or elsewhere. The company has been careful to stress its compliance with Beijing’s guidelines since gaming crackdowns of past years threatened to sap its business.

“We’re making good progress, and if you look into the different components, the model building is progressing well,” Lau told analysts on a conference call. It’s using “high-quality public data, as well as high-quality public data within our ecosystem.”

Revenue rose 11% to almost 150 billion yuan ($21.4 billion) for the three months ended March, exceeding the 146.29 billion yuan average forecast. But the net income of 25.8 billion yuan fell short of projections.

Tencent and peers like Alibaba, JD.com Inc., and Baidu are watched for clues to the health of Chinese business sentiment and consumption. JD.com’s revenue barely rose during the March quarter, but the more advertising-dependent search leader Baidu returned to double-digit growth. WeChat operator Tencent itself had only just resumed expanding revenue in the December quarter after months of decline.

Investors have flip-flopped on Chinese tech stocks this year, first buying into the belief that Beijing would rally the giant sector to boost the world’s No. 2 economy in 2023. But cheerleading by officials didn’t translate into concrete policy and signs have since grown that the country’s nascent economic recovery may already be petering out.

Tencent faces more specific challenges as well. It has yet to find its next big gaming success in China after Honor of Kings and Peacekeeper Elite cemented its lead in the pre-Covid era. The company aims to fill its long-empty pipeline in 2023 with hits like Valorant after Beijing’s censors resumed licensing approvals last year. Such new launches will test a rapidly saturating domestic market, where younger players are increasingly drawn to up-and-comers like anime specialist Mihoyo.

“Investors care more about geopolitics and China macro than stock specifics now,” said Vey-Sern Ling, managing director at Union Bancaire Privée...

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