Tencent's troubles mount with waning investor interest as shares slump to near 4-year low

Company is set to report its first quarterly revenue decline since 2008 financial crisis

Tencent headquarters in Shenzhen, in China's southern Guangdong province. AFP

Only 18 months ago, Tencent was on the cusp of becoming Asia’s second trillion-dollar company, as the Chinese internet major carried the fight for dominance to its US rivals.

But a more than $560 billion market value wipeout later, and with shares slumping to a near four-year low, investor hopes for a smooth recovery are on their last legs.

Next week, Tencent will seek to assure investors about its outlook during second-quarter results. They will not be easy to convince.

The company is set to report its first quarterly revenue decline since the 2008 financial crisis, weighed down by a slowdown in gaming sales.

“We need earnings recovery. But we do not see that yet,” said Paul Pong, managing director at Hong Kong-based Pegasus Fund Managers. “The biggest problem for Tencent, like many of its peers, is that growth has almost stalled.”

Since Tencent’s stock touched an intraday record in February 2021, it’s tumbled nearly 60 per cent and has lost more value than any other stock globally, Bloomberg data show. Alibaba Group, which has reported shares sinking 65 per cent in that time, ranks second in terms of the biggest losses at $495bn.

News that a series of Chinese firms are delisting from US exchanges also is weighing on sentiment — mainland tech stocks slipped in pre-market trading in New York on Friday.

In late June, e-commerce company Prosus — whose parent was an early Tencent investor more than two decades ago — became the latest high-profile backer to pare its stake. The shares dropped despite Tencent buying back HK$3.6bn ($459 million) of its own stock since then.

Part of the problem is that Tencent has not yet received regulatory approval for new video game licences, even as peers receive the go-ahead. Player spending on its wildly popular Honour of Kings mobile game has declined for three consecutive months since May, data from SensorTower showed.

Covid-linked lockdowns are hurting profits and media reports about lay-offs are causing concern.

“The market is pricing in no new game approval for Tencent this year, a double-digit decline in advertising revenue and struggling cloud businesses,” Julia Pan, a Shanghai-based analyst at UOB Kay Hian.

Ms Pan, who said that the Prosus sales will cap Tencent’s valuation, expects the company to cut more jobs in non-core areas to boost margins.

Whether that’s enough for a turnaround is another question. Even as authorities pledge to support the tech sector, economic concerns loom, including fears about a global recession and China’s strict adherence to "zero Covid" dampening advertising revenue.