Tencent may surprise with margin, shareholder return

TENCENT Holdings’s earnings report due on Wednesday (Mar 20) may provide positive catalysts for its shares, which have plummeted about 60 per cent from their record high three years ago.

While the company’s fourth-quarter sales growth may be the slowest in a year, some anticipate its profit margins will beat market consensus due to a shift towards high-margin segments. Also, the company may join its peers in boosting capital returns through increased dividends or share buybacks.

The company has made strides with so-called mini-games – a capital-light business of making titles available within its popular WeChat app – and a livestreaming video platform that competes with TikTok’s local language service in China.

“The areas where Tencent has higher profitability are growing faster than the areas that have lower profitability,” Ivan Su, an analyst at Morningstar, said. The short video business may help the company’s advertising revenue to surprise positively, he added.

Tencent’s shares have risen about 6 per cent over the past two months while the Hang Seng Tech Index has gained 12 per cent. The broader Internet sector has suffered a hit to advertising from China’s economic slowdown as well as sporadic regulatory crackdowns, and Tencent has also been hurt by an absence of major new game titles.

The company is expected to report that sales rose 8.6 per cent from a year earlier in the fourth quarter, the slowest expansion in a year. Its net income likely fell 69 per cent, according to estimates compiled by Bloomberg, while it is seen posting an operating margin of 30 per cent.

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“We all know that their game business is not doing so well,” Morningstar’s Su said. He notes that Dream Star – Tencent’s challenge to NetEase’s hit Eggy Party – failed to maintain strong momentum during last month’s Chinese New Year holidays.

Still, optimism may be growing for a catch-up in Tecent’s share price. The volatility skew – which measures the demand for bearish put options versus bullish calls – has fallen to the lowest since late 2021.

The stock could get a push if Tencent increases dividends or buybacks, following measures to increase returns by its major peers. Alibaba Group Holding last month boosted its share-repurchase programme by US$25 billion, while NetEase more than doubled its dividend payout.

“The market is hoping Tencent can be more proactive” on returns, said Jialong Shi, an analyst at Nomura International HK. Whether through dividends or buybacks, the company needs to keep pace with competitors, he said.

The shareholder yield offered by Alibaba, after including dividends and buybacks, could reach 7 per cent this year, JPMorgan Chase & Co wrote in a research note. That could be a target for Tencent to aim at.

“There is a compelling argument to be returning to shareholders,” said Nicola Lai, investment manager for Hong Kong & China equities at Barings. “We have observed that companies who are not focused on maximising shareholder value tend to trade at a discount.” BLOOMBERG