Tencent shares took a beating in 2018, but it’s a different story this year

FAN Editor

Tencent had a tough 2018.

Over $127 billion was wiped off the value of its shares as Chinese regulators clamped down on the video gaming industry, hitting one of the company’s main businesses. This year, however, is looking up for Asia’s most valuable technology firm.

Shares of Tencent hit a more-than six-month high last week and are more than 10 percent higher so far this year.

Beijing restarted approvals for video games in December after a nearly year-long hiatus. That, along with strong performances from Tencent’s big name titles and new entrants, has helped boost shares of the Chinese internet giant.

Any publisher that wants to release a game in China needs to get the green light from authorities. And, any company that wants to monetize a game, for example by offering in-app purchases, also needs approval. Online games accounts for over 30 percent of Tencent’s total revenues.

In March 2018, the Chinese government stopped approvals for new video games. In the second quarter of 2018, Tencent saw its first quarterly decline in net profit in nearly 13 years as a result of the government crackdown.

Chinese authorities expressed concerns about violent content in video games and alleged that the medium may be a cause of myopia in children.

Not only were games not being approved, but the sale of some titles was also banned. Tencent was forced to stop selling blockbuster hit “Monster Hunter: World” in August because its content did not meet regulatory requirements.

Tencent shares started 2018 off strong, hitting a record-high, but tumbled nearly 23 percent in the year. The lowest point came on Oct. 30 at 251.40 Hong Kong dollars per share.

As of Monday afternoon, Tencent shares are trading at about 355 Hong Kong dollars.

That recovery kicked off when China’s regulators restarted game approvals in December. Some of Tencent’s new titles were among the games given the green light in the latest wave of approvals.

One of those games called “Perfect World,” which is Tencent’s first major mobile title launch of 2019, was released on Wednesday. It is top of the Apple App Store “free” chart in China and was the top grossing app as of March 9, according to data from market research firm App Annie.

In a note released Thursday, analysts at Jefferies said they expect the game to have raked in 40 million to 50 million yuan ($5.95 million to $7.44 million) in revenues and is on track to beat the investment bank’s current estimate that it will gross 600 million yuan per month in the first quarter of launch.

Meanwhile, Tencent’s other games are performing well, particularly the blockbuster “Honor of Kings” title. In a note last week, Nomura estimated that the game’s gross billing likely surged to a record high of 7 billion yuan ($1.04 billion) in February, driven by a new upgrade. “Honor of Kings” was first launched in 2015 and is one of Tencent’s most popular games.

The record-high billing “could have increased in the past year, thanks to fewer competition from quality new titles as a result of the nearly one-year suspension of new game approvals,” Nomura analysts suggested in their note.

Jefferies said in its note that “Perfect World” combined with “Honor of Kings” will lead to “decent sequential recovery” for mobile game revenue in the first quarter of 2019, but year-on-year growth could be kept “under check” because of a tough comparison with the first quarter of 2018.

Shares of Tencent are up more than 10 percent year-to-date. Since the low in October, shares have rallied about 40 percent. The company’s market capitalization is up over $39.5 billion this year. Tencent shares, however, are still around 25 percent off their January 2018 record high.

Nomura and Jefferies both have “buy” ratings on Tencent’s stock. The average price target for Tencent shares is just over 394 Hong Kong dollars, according to Reuters. If that were realized, it would represent around a 12.5 percent upside from Monday’s opening price.

Analysts remain bullish on Tencent in the long-term because of other parts of the business such as payments platform WeChat Pay and advertising throughout its various properties.

“A long-term theme is to further unlock the value of its user base beyond game distribution, by diversifying monetization mechanisms (e.g. ads), expanding service/product offerings (e.g. fintech products, autonomous driving) and leveraging user access for marketing Tencent-branded enterprise services (e.g. cloud),” Charlie Chai, analyst at 86 Research, told CNBC.

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