Tencent: New Growth Opportunities In Games Overseas And Short Video Ads

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Building of TENCENT institution successful Shenzhen, China


Chinese tech elephantine Tencent’s (OTCPK:TCEHY) revenues person been decelerating complete nan past fewer quarters partially driven by a shrinking games manufacture arsenic a consequence of a covid-induced economical slowdown and a crackdown by Chinese regulators connected the country’s Big Tech companies.

However arguably overmuch of these headwinds are down nan company, and longer word location are reasons to beryllium optimistic astir nan company’s prospects.

Receding home crippled headwinds, overseas description

After decades of robust growth, China’s games industry, nan world’s largest, saw income statement successful 2022, nan first income diminution since 2005, mostly nan consequence of economical weakness and a regulatory crackdown connected games companies starting successful 2021, successful an effort to curb gaming addiction, and purge unwholesome contented (such arsenic games pinch contented that was violent, celebrated excessive wealthiness aliases fostered personage worship). China’s wide gaming crippled income grossed CNY 265.9 cardinal successful 2022, a 10.3% YoY decline, while nan country’s gaming userbase shrank 0.33% YoY to 664 million users successful 2022.

For Tencent, nan world’s top gaming company, headwinds to its biggest business (games accounts for astir a 3rd of Tencent’s revenues) resulted successful a driblet successful revenues complete nan past fewer quarters. For Q3 2022, home games revenues dropped 7% YoY "as transitional manufacture challenges resulted successful little paying personification counts", aft seeing a 1% YoY driblet successful Q2 2022, and successful Q1 2022.

Tencent’s home headwinds look to beryllium receding. Last year, nan Chinese authorities restarted crippled approvals aft an 8-month freeze, and nan government’s granting of 88 online crippled publishing licenses past period suggests nan government’s supportive stance towards nan sector. Tencent was among publishers to secure licenses for a clutch of mobile crippled titles past year. Meanwhile China’s accommodative monetary argumentation (China has been trimming liking rates since August past year) could stimulate crippled spending adjacent term.

Longer term, China’s mobile games marketplace is still expected to spot affirmative growth. As China moves up nan income ladder, mobile crippled spending per personification could increase, driving nan marketplace arsenic well. China’s mobile crippled mean gross per personification (ARPU) astatine astir USD 153 successful 2022, is expected to summation to USD 175 by 2027.

China mobile games ARPU forecast


Global games marketplace intelligence patient Niko Partners sees China’s mobile games marketplace reaching USD 40.53 by 2026 from USD 34.09 successful 2022, representing a CAGR of 4.4%, a affirmative inclination for marketplace leader Tencent.

China mobile games marketplace forecast 2026

Niko Partners

With overmuch of nan home online gaming marketplace successful its hands (Tencent commands a 51.5% stock of China’s online gaming market) Tencent is looking to thrust maturation done overseas description pinch ambitions to make half of crippled revenues from extracurricular China (up from astir 25% currently).

The company’s strategy is to create a world games ecosystem that integrates gaming, developing, and publishing systems and towards that extremity nan institution has been making fierce investments and acquisitions successful overseas crippled publishers, arsenic good arsenic acquiring distribution rights to grow its world reach. Notable acquisitions and investments made by Tencent precocious see French games developer Ubisoft (OTCPK:UBSFY) (OTCPK:UBSFF), Copenhagen-based Sybo Games, Japanese crippled developer FromSoftware, British crippled developer Sumo, Slovenian crippled developer Triternion.

Tencent presently has a presence successful nan United States, Europe, nan Middle East and Southeast Asia and is seeing affirmative traction overseas (overseas crippled revenues accrued 3% YoY successful Q3 2022, and 4% successful Q1 2022, only dipping a flimsy 1% successful Q2 2022), notably successful nan United States, Japan, and South Korea, nan world’s 4 biggest gaming markets aft China. Tencent’s caller crippled “Goddess of Victory: Nikke”, published by Level Infinite, Tencent’s Singapore-based world games publishing arm, topped nan App Store and Google Play Store rankings successful respective regions including North America, Korea, and Japan soon aft its motorboat past November.

World's biggest crippled markets by crippled revenues


The gross imaginable for these 3 markets unsocial is substantial. At astir USD 451 successful 2022, America’s mobile crippled ARPU is 3 times higher than China’s mobile crippled ARPU of USD 153 nan aforesaid year, and further ARPU maturation is expected successful nan coming years.

united States mobile crippled ARPU forecast


Japan and Korea, connection arsenic charismatic gross maturation opportunities; some countries person higher ARPUs compared to nan U.S., pinch maturation expected complete nan coming years..

Advertising a perchance important gross driver

Advertising is presently Tencent’s smallest business segment, accounting for somewhat much than a tenth of revenues, but nan conception holds imaginable to look arsenic a meaningful gross driver pinch short video emerging arsenic nan adjacent battleground for Chinese integer advertisement spending.

The short video advertisement abstraction is dominated by rivals Bytedance’s Douyin (TikTok's sister app successful China), and Kuaishou (OTCPK:KUASF) (OTCPK:KSHTY) and though a comparative latecomer (Tencent launched WeChat Channels - Tencent’s short video level wrong its ubiquitous WeChat app - only successful 2020, and began rolling retired ads only successful July past year) Tencent has respective advantages that could thief nan institution seizure a stock of China’s advertisement walk connected short video platforms. For one, influencers pinch a important backstage pursuing connected WeChat (Tencent’s messaging level utilized by virtually everyone successful China), could easy induce their users to travel them connected their respective WeChat Channels accounts arsenic well, which successful move helps Channels get postulation astatine a accelerated pace, costs efficiently. Tencent has besides made Channels very charismatic to contented creators and merchants successful position of introduction thresholds and cost; for lawsuit Channels charges merchants commissions of 1%-5% for income generated connected nan level 1% to 10% for merchants trading connected Douyin. Meanwhile Channels users pinch conscionable 10 followers could monetize their videos done ads, down from 1,000 followers earlier, versus Douyin requires contented creators to person 10,000 followers to commencement monetizing. Tencent is besides leveraging its immense ecosystem of user tech services to connection greater functionality for short video contented creators done greater integration. For instance, contented creators tin behaviour an question and reply utilizing Tencent Meetings (Tencent’s reply to Zoom), and easy livestream it connected Channels. During nan livestream, hosts tin see merchandise links that nonstop viewers consecutive to nan product’s Mini Program eCommerce store, which users tin bargain and salary for utilizing WeChat Pay, each without leaving WeChat’s app. Tencent’s ecosystem and its resulting trove of user information could besides perchance amended their proposal algorithm, benefiting users (through much applicable contented and advertising) and truthful advertisers arsenic well. Rivals Douyin and Kuiashou arguably do not bask this ecosystem advantage.

Channels already has affirmative numbers to show for their effort; Channels views grew complete 200% YoY, while video views based connected AI recommendations jumped 400% YoY. Total GMV skyrocketed 800% YoY. With nan level gaining traction astatine a accelerated clip, advertisement dollars are apt to travel and nan imaginable is meaningful pinch Tencent poised to seizure share, perchance from weaker rivals specified arsenic Kuaishou (whose advertisement monetization efforts are reportedly beneath soul expectations, partially owed to not-precise enough algorithm recommendations, an advantage Tencent could exploit) and Bilibili (BILI). Kuaishou’s advertisement revenues are estimated astatine complete CNY 40 billion, Bilibili’s advertisement revenues are astir CNY 4.5 billion while Douyin generates a mammoth CNY 260 billion, compared pinch Tencent’s advertisement revenues of conscionable CNY 73 billion successful 2021 (not generated from their short video level which launched short video ads only past year, but from different online existent property crossed Tencent’s sprawling ecosystem).

After taking a beating successful November amid, nan banal managed to retrieve immoderate mislaid marketplace worth but is still down 22% complete nan past year.

Tencent 1-year stock price

Seeking Alpha

With a guardant P/E of 26 and P/BV of much than 4, immoderate whitethorn position Tencent arsenic pricey but others whitethorn see it adjacent for a highly profitable institution pinch affirmative maturation prospects astatine location arsenic good arsenic overseas, notably successful developed markets specified arsenic nan U.S. and Europe wherever considerably higher user spending powerfulness opens important gross and net maturation opportunities.









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Analysts are mostly bullish connected nan stock.

Analyst standing - Tencent


Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

LD Investments floor plan picture

Long only, focused connected precocious value businesses pinch economical moats and coagulated business fundamentals. Sector and surface science agnostic. Long word finance horizon. None of nan articles represent finance advice.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Additional disclosure: This is not a proposal to bargain aliases waste immoderate banal mentioned. Please consult pinch a master finance advisor anterior to making immoderate decisions.

Editor: Naga

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