Tencent Holdings is set to release its earnings report on Wednesday, March 20, amid expectations that it could offer a boost to its shares, which have seen a significant decrease of approximately 60% from their peak three years ago. Despite predictions of the slowest quarterly sales growth in a year, analysts are optimistic about the company’s profit margins outperforming market expectations due to a strategic focus on high-margin business segments. Furthermore, there is anticipation that Tencent may enhance shareholder value through raised dividends or share repurchases.
The company has gained traction with its investment in mini-games and a livestreaming video platform, competing against TikTok’s service in China. These ventures into capital-efficient businesses within its widely used WeChat app have been identified as areas with higher profitability. “The areas where Tencent has higher profitability are growing faster than those with lower profitability,” stated Ivan Su, an analyst at Morningstar. He also suggests that Tencent’s advertising revenue could see a positive outcome from its short video business.
Over the past two months, Tencent’s shares have experienced a roughly 6% increase, while the Hang Seng Tech Index has seen a 12% rise. The broader Internet sector, however, has faced challenges due to China’s economic slowdown and periodic regulatory measures, impacting advertising revenue and the introduction of new game titles.
Estimates suggest Tencent’s sales growth for the fourth quarter stood at 8.6% year-over-year, marking its slowest pace in 12 months, with net income potentially dropping by 69%. The company is also expected to report an operating margin of 30%. According to Su, “We all know that their game business is not doing so well,” highlighting the performance of Dream Star during the Chinese New Year period as an example.
Despite these challenges, there is growing optimism for a recovery in Tencent’s stock value. The demand for bearish put options compared to bullish call options has decreased significantly, reaching its lowest point since late 2021.
Speculation about Tencent potentially increasing dividends or buybacks has emerged, especially following similar actions by major competitors. Last month, Alibaba Group Holding announced a $25 billion increase in its share repurchase program, and NetEase significantly raised its dividend payout. “The market is hoping Tencent can be more proactive on returns,” noted Jialong Shi, an analyst at Nomura International HK, emphasizing the importance of keeping pace with competitors.
Investment analysts, including those from JPMorgan Chase & Co, suggest that Tencent could target a shareholder yield comparable to Alibaba’s, which could reach 7% this year when accounting for dividends and buybacks. “There is a compelling argument to be returning to shareholders,” said Nicola Lai, investment manager for Hong Kong & China equities at Barings, pointing out the market trend of undervaluing companies that do not prioritize maximizing shareholder value.
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