We are more optimistic about Tencent's Q2 results than the market. The bears may focus on the slowing growth, the tepid ads business outlook due to online education crackdown, and regulatory headwinds to the gaming business. We reckon most of these negativities have been priced in and weigh more on the sentiment than the fundamentals.
First, although the regulatory headwinds are likely to persist, the real impact might be limited. 1) Teenage players only contribute a fraction of gaming business revenue. 2) The removal of special treated tax status may only affect the tax rate of some subsidiaries by a few percentages. 3) Tencent holds itself to higher standards within the industry regarding data security. 4) Its profits do not come from commissions on SMEs or gig economy workers. All in all, the damages to the company's fundamentals seem manageable. Tencent also proactively responds to the government's initiatives for social wealth re-balancing, alleviating regulatory pressures from the government.
Second, the revenue growth decelerated but partially due to a higher base effect. Gaming growth slowed down post-Covid, but the international gaming revenue grew 37% (ex. FX) higher than domestic gaming and now accounted for 25% of total gaming revenue. Fintech and business services maintained a high growth rate of 40%, showing Tencent's making smooth progress in the to-B businesses. The education industry crackdown might hit the online ads business. Still, the vacancy of the ads buying from the education industry could be filled by other industries soon, given that Tencent's ads inventories are the premier spots.
The valuation has fallen to a record low-ish, factoring in most of the headwinds. We believe the Chinese Internet industry will live up to the new norm per the new regulatory reality. Tencent will grow steadily and still be the face of China's new economy and tech innovation.
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