SIMON BROWN: I’m chatting now with Schalk Louw from PSG Old Oak, talking Tencent results. Second quarter revenue was down 3%, although it was just below $20 billion – let’s be clear, this is a giant of a business – and earnings [are] down just over 50%.
Read: Tencent unveils first-ever sales fall, job cuts as economy sinks
Schalk, I appreciate the early morning time. The company missed expectations, both top line and bottom line, but truthfully with a weak China economy, the the hard shutdowns we’ve seen with the zero-Covid idea in China, [and] regulatory concerns, the results perhaps weren’t the train smash that the numbers seem to maybe suggest.
SCHALK LOUW: No, they aren’t. Firstly, good morning, Simon, and morning to all the MoneywebNOW listeners. We had this conversation I think two, three weeks ago, Simon, you and I, when we chatted about tech companies, more specifically these e-commerce type of companies. We said typically when the going gets tough, the tough definitely spend less on ads. This was no different. You were talking about a 3% decline in revenue. Let’s just put that in perspective.
This is 3%. Behind the 134.03 billion renminbi or yuan forecast It was 134.6 yuan. So a slight miss, a slight miss. When we look at the earnings per share, there was an expectation of 2.55 yuan, and it came out at 2.9 yuan.
On that side it’s a bit of a beat. Maybe that’s the reason why Tencent should actually be called a R200 note this morning because they actually are over 3% up. But let’s just drill through it, because I think it’s very important to look at Tencent and the parts. Now more than 50% of the business is made up of the VAS structure. That’s basically value-added services, social media and gaming. A smallish portion, let’s call it 17%, well, now 14% of their business is made up of online advertising.
That’s why I said online advertising was sort of the culprit in this scenario. Last year this time around, or let’s call it the end of the second quarter, Q2, it came out at 22.8 billion yuan. And this time around it was 18.6 billion yuan.
So there is more or less the whole 4 billion yuan loss that they’ve made over this period. So that’s the biggest culprit, but they do mention in this report that the revenue decline that they’ve seen from ads has now started to stabilise. So it does seem like things [are stabilising].
Another interesting fact, Simon, is they actually mention in their report that approximately half of their revenues closely contribute to and benefit from the Chinese economy. We know the Chinese economy is struggling. That’s the main thing.
The share price has been struggling. This is a share price that in the heydays – and when I say heydays I usually look at the heydays for Naspers and later Naspers and Prosus – in the heydays, 2020, just prior to Covid, this is a share price that was trading at HK$750. Today, after a let’s call it more than a 3% jump in the share price, is trading at only HK$312. So a massive, massive decline – not expensive any more.
SIMON BROWN: That’s my sense. WeChat [has] 1 billion users – that’s a big number. And preface up front, the weaker China economy, the Covid-19 lockdowns, the regulatory crackdowns, if we assume that in time those will pass – and that might be in six months, it might be longer, we don’t know – this remains a juggernaut of a business.
SCHALK LOUW: Oh yes. This is not a Mickey Mouse company. This is a massive, massive company. If this company was moved towards the West, the multiples that it was trading at would’ve been double, most probably triple the multiples. We are looking at a company that’s currently trading at a forward PE of less than 14. We’re looking at 13.8 times. This is a cheap, cheap company.
But [investors] should note that when they invest in Tencent and subsequently in Naspers/Prosus process as well – because over 70% of the Prosus share price is made up of Tencent – [they] should know … a little bit more than two weeks ago we were sitting on pins and needles [with] [US Congresswoman Nancy] Pelosi going towards Taiwan and everybody was thinking, ‘Oh, could this be the start of a war between China and Taiwan?’ As I mentioned, 46% of the business is basically sensitive towards China.
If China goes into a full-blown war, you should ask yourself what the effect could be for a share price like Tencent, also things like Alibaba.
But I think if I need to make a call, I still believe this is a company that’s trading at great multiples. It does seem like they’ve managed their business affairs pretty well.
When I look at the forecasted earnings, definitely a beat on the forecasted earnings. And, as they mentioned, it does seem like the revenue decline is now under control.
SIMON BROWN: I take your point in that. Management was also saying that they are talking and doing lots around cost control
We’ll leave that there. Schalk Louw of PSG Old Oak, I appreciate the time.
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