Tencent Q4 21 – Long shadow of the state

Tencent cheers its own demise.

• Tencent reported disappointing results in which it cheered the crackdown which has caused it so many problems and also declined to buy back any shares all of which caused the shares to fall.
• Q4 2021 revenues / EPS were RMB144.2bn / RMB9.79 compared to estimates of RMB146.5bn / RMB3.35.
• The much higher than expected EPS was due to non-operating financial gains which are not expected to be repeated in the coming fiscal year.
• Overall revenues grew by 8% YoY in Q4 2021 driven almost entirely by Fintech which grew by 25% YoY to RMB48.0bn.
• Online advertising fell by 13% YoY and content and games revenues grew by 7% YoY to RMB71.9bn.
• Given how almost every other company in the world that sells advertising and content had a pretty good Q4 2021, one can pretty much put all of these woes down to the regulatory crackdown.
• It has also become painfully clear the degree to which the private sector remains in the thrall of the state as management cheered the new environment that has decimated its growth and wiped out 50% of the wealth of its shareholders.
• Hence, the outlook for Tencent is that growth will return, but the elephant of the state on its back is going to limit the degree of its recovery.
• The fundamental problem that Tencent has is that its businesses operate in areas (social networking, games and finance) that the state is very sensitive to.
• This is because, as the West has discovered, social media has a meaningful impact on social and cultural issues which if they get out of hand, could represent a threat to the CCP’s ability to govern China.
• This sensitivity also greatly increases the risk of regulation of Tencent’s Fintech business which in the worst-case scenario could wipe out most of its value as has happened to Ant Group (see here).
• I think that the risk of such an extreme remedy has declined materially now that the state has recognised just how much damage it has done (see here), but some sort of intervention remains likely.
• By contrast, Alibaba is pretty much (and has been for some time) out of the woods when it comes to regulation.
• A large reason for this is that it operates in e-commerce which is not a sector that has any real bearing on the social fabric or economic wellbeing of China, meaning that the CCP can pretty much leave it alone without any real worries.
• This is precisely what has happened, and following its monster fine and bit of price tweaking, Alibaba is pretty much back to its old self and without Jack Ma.
• The problem is that the Chinese economy is not cooperating in large part due to the Covid-zero policy meaning that the borders are still effectively closed and the economy is on standby.
• It is not until China realises that it has to live with Covid and opens up will Alibaba’s growth resume.
• I am not expecting that it will go back to where it was but I think the outlook for Alibaba remains better than it is for Tencent over the medium term.
• Hence, Alibaba should go back to moderate growth while Tencent may struggle given the heavier regulatory burden it is likely to endure.
• Hence, I am continuing to hold onto Alibaba which is looking not quite so beaten up these days and whose valuation remains extremely attractive.
• I also continue to be pretty cautious on Tencent.