Tencent Q4 19 – Scant data

Tencent gives little relief from virus uncertainty.

• Tencent reported good Q4 19 results but with all eyes focused on the economic impact of Covid-19 on the Chinese economy, Tencent’s lack of disclosure did little to alleviate the uncertainty which is why the shares continue to follow the rest of Hong Kong down.
• Q4 19 revenues / EPS were just ahead of expectations at RMB105.8bn / RMB2.643 just ahead of consensus at RMD106.0bn / RMB2.713.
• As usual, Tencent was very scant on guidance but did have the following to say about the outlook for Q1 2020.
  • First, mobile payments: These took a big hit as restaurants and shops did not open during Chinese New Year.
  • However, transactions have rebounded very quickly as China has gone back to work.
  • Tencent reduced marketing expenses during the period and so expects little impact on profitability.
  • However, it stopped short when it comes to the one thing that everyone really wants to know which is demand.
  • I estimate that it has taken a significant hit but the fact that it has bounced back quickly is encouraging when considering other regions of the world.
  • Second, online advertising: saw some weakness during the outbreak but overall Tencent is still expecting a YoY increase for Q1 2020.
  • I think that this is a result of the very short period for which the Chinese outbreak lasted.
  • Only a tiny percentage of the population has been exposed thanks to the draconian quarantine actions and so the economy appears to picking-up again quite quickly.
  • Given that the rest of the world may experience a more prolonged outbreak with far more cases, longer isolation and periods of economic inactivity, the read-across here is unreliable.
  • Hence, I think that Google, Facebook etc outperform the US average in terms of impact but there will still a much greater impact on them than we have seen in China.
  • Third, cloud: which has seen a short-term impact due to project delays and economic inactivity.
  • From Tencent’s commentary, I don’t think that this has come back nearly as quickly as the consumer, although the company is optimistic that in the long-term, there will be a more rapid migration to the cloud and remote services as a result of the outbreak.
  • However, I do not see any real read-across for AWS or Microsoft who are far ahead of Tencent in the roll-out of the cloud.
  • However, the great distance learning and remote working experiment can only accelerate the move to the cloud, making Microsoft in particular (higher % revenue exposure) the biggest beneficiary.
  • Fourth digital entertainment: has seen a big jump in engagement as one would expect.
  • This has been observed across the range including video, games and e-books.
  • Tencent believes that this increase in engagement is permanent but I think that this is unlikely.
  • This is for no other reason than as users return to work they will have less time to engage with these services.
  • However, what it does signal is an acceleration from offline media consumption like cinema or broadcast television to streaming.
  • I suspect that a similar trend is likely to happen elsewhere but subscription-based services like Netflix will only benefit if there is a jump in users.
  • It is the usage-based services that are likely to see the biggest increase in engagement which tend to be monetised via advertising.
  • Hence, I suspect that it is Google’s YouTube and ByteDance’s TikTok and Twitter that may be the biggest beneficiaries.
• Overall, the read-across from Tencent’s numbers is not very reliable.
• It has been pretty vague and given no numbers which combined with the fact that the Chinese outbreak is very different to everyone else’s makes it hard to have a firm view.
• Fortunately, I don’t think that a firm view is needed on this at the moment as the markets are in free fall and the pulling out all the fiscal stops has only caused them to pause for breath.
• Hence, I remain out of the market and I am staying that way for now.