Stocks of a prominent Chinese technology company Tencent Holdings is a Chinese multinational conglomerate company. ( TCEHY -3.35% ) The stock price dropped by 5.9% initially today but later improved to a 4.1% decrease by 2:35 p.m. EDT.
Initially, identifying the cause of the decrease was challenging. Tencent’s performance in the second quarter exceeded predictions, particularly with a rebound in its significant Domestic Games division. Nevertheless, Tencent’s financial technology sector experienced a significant slowdown, aligning with other adverse financial reports from China on the same day. This appeared to overshadow the positive internal developments of the company.
Tencent sees an increase in revenue from domestic games.
In the quarter, Tencent achieved an 8% increase in revenue, attributed to the company’s ongoing efforts to reduce costs and refocus its operations. non-IFRS The gross profit increased by 21% and the operating profit increased by an even higher 27%.
In the midst of China’s economic deceleration and government scrutiny on major tech firms, Tencent has effectively reduced expenses to increase earnings, despite experiencing a slower revenue growth than it did five years ago.
Positively, Tencent’s significant gaming division saw a 9% increase, marked by a rebound in revenue for its local gaming sector. The revenue from domestic games grew by 9% during the quarter, keeping pace with the growth seen in international games. This marked a significant improvement from the previous quarter, which had experienced a 2% decline in domestic game revenue. Tencent had faced challenges due to government regulations and delays in gaming approvals, making this return to growth a promising development.
Nevertheless, Tencent experienced a decrease in the growth rate of its Fintech & Business Services division, particularly in the fintech sector. This deceleration was only in the single digits, and Tencent explained it as being caused by reduced consumer spending and a drop in revenue from consumer loan services due to stricter risk management practices.
The decrease in economic activity and stricter lending conditions in China were consistent with other recent macroeconomic indicators. In July, new loans in China fell sharply by 88% compared to June, totaling only 260 billion yuan ($36.29 billion), which was lower than the expected 400 billion yuan ($55.83 billion). This also represented the first decline in lending on a year-over-year basis in China in almost twenty years. These figures suggest that domestic spending may remain subdued despite the unexpected interest rate reductions by the People’s Bank of China, the country’s central bank, last month.
Tencent continues to be a strong investment option.
For individuals ready to accept the potential political challenges of investing in China, Tencent represents a top-notch stock available at a very attractive price. The current price of shares is lower than The earnings estimates for next year are predicted to be 16 times higher than the current earnings. Nonetheless, Tencent also possesses investments in external companies amounting to over $125 billion, representing more than 25% of its overall assets. market cap It also holds a small amount of cash in excess of its debts.
Without considering those two factors, Tencent’s stock is valued at a price-to-earnings ratio of under 12 and has seen a 27% increase in operating profit. Although the future growth of the company may be impacted by the Chinese economy, Tencent has demonstrated its ability to innovate and expand its primary operations in the challenging market conditions.
