Tencent Q4 2022 – Somewhat green

Chinese tech remains hostage to the economy.

• Tencent reported mediocre results and said that it was well positioned for an economic recovery but signs of this recovery and action from the state to stimulate a recovery remain frustratingly absent.
• Q4 2022 revenues / EPS were RMB145bn up 0.5% YoY / RMB10.98 up 19% YoY both of which were broadly in line with market forecasts.
• Profit growth was entirely derived from a one-time benefit of selling some of the shares that it holds in Meituan and would have declined materially without this gain.
• That being said, these results are being seen as good news as the predations of the state from both a regulatory standpoint and Covid Zero are fully reflected in the company’s results, meaning that there should be better times ahead.
• This was reflected in management commentary where Tencent said that it was well positioned to benefit from a rebound in China’s economic growth and it can already see the first signs of this.
• Here, Tencent is referring to user activity across its platforms which allowed advertising to return to growth posting a 15% YoY improvement.
• This was also seen in engagement with its video assets which saw a return of growth in both the number of DaU and the time spent engaged with the service.
• The implication here is that this will translate into revenues and a resumption of growth in 2023 but I suspect that, like Alibaba, Tencent will remain hostage to the economy.
• After the reputational damage that Covid Zero inflicted upon President Xi and the CCP, I have long been of the opinion that the CCP needs to be seen to be making an effort to keep its side of the social contract.
• This is the unwritten agreement that exists between the Chinese people and the CCP where the Chinese people give up a lot of their freedoms and in return, the CCP delivers improvements in prosperity.
• With Covid Zero, the CCP has not kept its side of the bargain and consequently needs to step up in order to get back into the good graces of the population.
• However, there is no sign of an economic stimulus despite there being space to cut interest and inject fiscal stimulus without triggering an unmanageable bout of inflation.
• I was expecting something along these lines to be announced at the National Party Congress a couple of weeks ago but nothing was forthcoming which is leading me to worry that the economic bounce I have been expecting may not occur.
• This will leave China’s stock market and the technology sector in the doldrums with improvements in profitability but little if any growth.
• This is not a scenario where we see a rapid recovery in the Chinese technology sector meaning that it may not outperform global technology in 2023 as I have previously been expecting.
• The Chinese technology sector still offers excellent value, but I may have to be somewhat more patient than I expected when sitting on my current position in Alibaba.