Since the beginning of this year, Tencent (00700. HK) has fallen by 17.37% and its market value has evaporated by more than HK$700 billion.
Since the second half of last year, geopolitical uncertainty, regulatory risks, and interest rates have increased the impact on the direction of funds, including Apple (AAPL.US), Tencent, Alibaba-SW (09988.HK, BABA. Big tech stocks, including the US) and others, have been hit hard.
Tencent has been more affected:
1. The game industry has strengthened supervision and suspended the issuance of game approvals from July 2021, and the performance of the game business, an important source of revenue and profit, has been impacted;
2. The regulation of the education and gaming industries also affects the willingness of advertisers to advertise, dragging down the growth of advertising business, another important source of income;
3. Antitrust supervision, or prompting Tencent to become more cautious in investment projects and expansion, and began to reduce some of its financial investments, such as the distribution of JD-SW (09618.HK, JD. US) special dividends in the form of shares;
4. The tightening of global funds will also have an impact on the valuation of some of Tencent's start-up investments.
Coupled with the uncertainty of the international situation, international funds are hovering left and right between risk aversion and adventurous advances, which also increases the volatility of the capital market and makes large technology stocks more volatile.
However, the recent regulatory release of positive, or can ease the market atmosphere, including: encourage The compliance of Chinese stocks to list; a number of regulatory implementations are conducive to eliminating uncertainty, such as the supervision of e-cigarettes.
The recent restart of the game version is undoubtedly a shot in the arm.
The game version restart is good for a number of game stocks
According to the approval information of domestic online games released on April 11, there are 45 approved games, of which three are operated by Hong Kong-listed companies, including:
1. Heartbeat Company (02400. HK) of the "Party Star";
2. Dreamland (01119. HK) (Tencent holds a 17.88% stake) of "Beware of The Fire Candle";
3. Baidu Group-SW (09888.HK, BIDU.US) "Attack on Rabbit".
Neither top-tier game providers Tencent nor NetEase-S (09999.HK, NTES.US) have been approved, but this does not hinder the carnival of game stocks.
Driven by this news, game stocks have risen sharply, of which Tencent and NetEase have risen well, see the following table. Because this news sends a positive industry signal, with its own development capabilities, the head game company is still expected to get a version number in the future.
Is Tencent's game business ready?
Since 2018, the domestic game industry has experienced two game version suspensions:
One occurred from April to November 2018, when the regulator implemented total control over online games, controlled the number of game operations, took measures to limit the use time of minors, and included minors' accounts in the anti-addiction system. Approvals were not reopened until December 2018.
The other time is from July 2021 to March 2022, in the context of double reduction and three-child opening,000, juvenile protection measures have been further strengthened, and game companies have strengthened anti-addiction measures for minors in response to regulatory requirements.
As shown in the chart below, tencent's game revenue growth fell to a low level in the third quarter of 2018 and the fourth quarter of 2021, when the version number was discontinued, while in the first quarter of 2019 after the resumption of the version number approval, Tencent's game business revenue growth rebounded.
In fact, when releasing the 2021 annual results, Tencent expected that the impact of the protection measures for minors would be fully digested in the second half of 2022, and believed that after the release of the new version, it would benefit from the launch of more new games.
More importantly, with the saturation of the growth of users in the domestic game market, from dividends to stock competition, coupled with the strengthening of supervision, the head game operators to layout overseas markets as a countermeasure, Tencent from the third quarter of 2021 to separately present local games and international game business revenue, to show the importance of international game business.
In the fourth quarter of 2021 and the full year of 2021, Tencent's local game business revenue was about 30.3 billion yuan (unit RMB, the same below) and 128.8 billion yuan, respectively, an increase of 2.97% and 6.90% year-on-year, while the international game business grew strongly, up 38.69% and 32.79% year-on-year, respectively, to 13 billion yuan and 44.8 billion yuan, an increase far exceeding the local game business, boosting the overall performance of the game business.
See the figure below, the proportion of international game business is getting higher and higher.
International research agency Newzoo expects that the output value of the global game market in 2021 may grow by 1.41% year-on-year to $180.3 billion, and is expected to expand to $218.8 billion by 2024, with a compound annual growth rate of 8.7% from 2019 to 2024, as shown in the chart below.
As can be seen from the chart below, mobile games account for more than 52% of the global game market output value, with an annual growth rate of 7.3% in 2021, far better than the overall level of the industry. It is foreseeable that the strong growth of the overall gaming market in the next five years should be mainly driven by mobile games.
Through the data of Newzoo and domestic research agencies Gamma data, the author found that the proportion of domestic mobile game revenue in the global mobile game market revenue has increased year by year, or from 25.60% in 2015 to 37.99% in 2021, see the figure below. In other words, the importance of the Chinese market in the international market is gradually expanding.
As a leading game company, Tencent can not only benefit from the internal growth of the Chinese market, but also grasp the growth of the global game market with its "going to sea" plan and investment in game studios at home and abroad.
According to Tencent, in terms of international mobile games, five of the top ten games by daily active number are developed and operated by it, including PUBG, Clash Royale, etc.; League of Legends is the top three PC games by monthly live; Valorant ranks first in Twitch's strategy games.
Tencent said it will continue to launch new games for the international market, which are expected to help its growth in 2023 and beyond.
Therefore, with the resumption of domestic issuance of version numbers, coupled with the strong performance of the overseas business, Tencent's game business is expected to recover in the second half of this year.
Has the other business turned the corner?
The improvement of the overall game market atmosphere is expected to boost the business needs of advertisers and should be conducive to Tencent's advertising business. On the other hand, as it adapts to the new regulatory environment and upgrades advertising solutions, the advertising business may resume growth by the end of 2022.
In addition, Tencent is exploring monetization opportunities for video accounts by allowing more users to reach content creators, advertisers and merchants. It plans to explore commercialization by expanding the scale of live streaming tipping; expanding the total sales value (GMV) of live e-commerce to make monetization possible; and testing and optimizing short video feed ads in 2022.
Recently, Tencent Video has increased the membership fee, and at the same time, it will exert efforts from the cost side to optimize the cost structure, which may reduce losses.
In terms of enterprise SaaS monetization, it may plan to integrate three businesses to enhance collaboration and productivity by increasing the penetration rate of Tencent Conference, Enterprise WeChat and Tencent Documents, and looking for monetization opportunities.
Continue to buy back
According to Wind's data, since 2022, Tencent has repurchased a total of 13.68 million shares, with a repurchase amount of HK$5.498 billion. In less than four months, it is already 1.13 times and 1.16 times the total number of repurchases and the size of the repurchase amount between 2014 and 2020.
However, the HK$5.498 billion repurchase amount is only equivalent to 0.156% of its current market value of HK$35,000, which is not too significant.
It is worth noting that Tencent pays out equity dividends to its executives every year, and there are many warrants that are exercised (increasing the number of issued shares), so buying back and canceling (or not canceling) does not necessarily reduce the number of issued shares at the end of the period.
Taking this year as an example, the number of shares outstanding at tencent at the beginning of the year was 9.608 billion shares, and by April 11, 2022, the number of its issued shares still reached 9.612 billion shares.
Therefore, Tencent's buyback move may release a positive signal at the psychological level and show the market its optimistic attitude towards the company's prospects. In terms of scale, it is far less generous than Alibaba's $25 billion buyback program.
epilogue
Whether it is to show attitude or to further enhance shareholders' rights and interests, the restart of the game version number and Tencent's continuous repurchase are releasing positive news to the market.
If Tencent is issued a version number, the game business will return to strong growth, and the advertising and other businesses will also see an improvement, which may really consolidate its fundamentals and support valuations.
However, it should also be noted that the tightening of monetary policy in the United States will lead to an increase in the cost of international funds, tencent holds a large number of unlisted investments and listed investments involving unprofitable technology companies (including many overseas or overseas registered start-ups), the valuation of these companies is generally calculated according to market interest rates (especially the US dollar interest rate), and the rise in interest rates will cause their valuations to decline, or reduce Tencent's potential investment returns.
Given that Tencent's valuation already includes the market's estimate of its investment, if the return on investment shrinks significantly, it may reduce the market's expectations for Tencent, thereby putting pressure on its valuation.
While the positive news is encouraging, the risks that may arise from changes in the market situation also need to be guarded against.
Mao Ting