Tencent delivered solid earnings, but macroeconomic fears in China appeared to outweigh the good results.
Shares of Chinese tech giant Tencent Holdings (TCEHY -3.35%) plunged 5.9% at one point today before recovering to a 4.1% decline as of 2:35 p.m. EDT.
At first, it was hard to pinpoint the reason for the decline. Tencent’s second-quarter results came in ahead of expectations, including a return to growth in its important Domestic Games segment. However, Tencent’s fintech segment slowed markedly, which dovetailed with other negative financial data out of China today. That seemed to outweigh the other good company-specific news.
Tencent delivers a return to domestic-games growth
For the quarter, Tencent delivered 8% revenue growth, but due to the company’s continued cost cuts and refocus, non-IFRS gross profit rose 21% and operating profit rose an even higher 27%.
Amid China’s economic slowdown and crackdown on leading tech companies by the government, Tencent has done an excellent job of cutting costs in order to boost profits, even with its new lower revenue growth compared with five years ago.
Encouragingly, Tencent’s important games division rose 9%, with a return to growth for its domestic-games segment. Domestic Games revenue grew 9% in the quarter, matching International Games growth. This was a nice acceleration from last quarter’s 2% decline for Domestic Games. Tencent had been particularly hard-hit by the Communist Party’s clampdown on video game play and a delay in gaming approvals, so this return to growth was an encouraging sign.
However, Tencent also reported a slowdown in its Fintech & Business Services segment, especially the fintech portion. That slowed to a mere single-digit growth, which Tencent attributed to “slow consumption spending, alongside a decline in consumer loan services revenue due to stronger risk control measures.”
That slowdown and credit tightening mirrored other macroeconomic data coming out of China late yesterday. New loans made in July plunged 88% from June to just 260 billion yuan ($36.29 billion), below 400 billion yuan ($55.83 billion) expected and marking the first year-over-year contraction in lending in China in nearly two decades. This data seems to portend continued sluggishness in domestic consumption despite last month’s surprise interest rate cuts from the People’s Bank of China, China’s central bank.
Tencent still remains a solid value
For those who are willing to take on the geopolitical risks of investing in China, Tencent is a very high-quality stock that can be had for a very cheap valuation. Shares currently go for less than 16 times next year’s earnings estimates. However, Tencent also has holdings in outside companies that total more than $125 billion, which is more than a quarter of its entire market cap. It also has a small net-cash position.
So, absent those two items, Tencent trades for less than 12 times earnings and just grew its operating profit 27%. While the Chinese economy will no doubt affect the company’s future growth, the company seems to have been able to innovate and grow its core businesses in the recent adverse environment.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tencent. The Motley Fool has a disclosure policy.
