Tencent doubles buybacks to over $12.8bn after sales miss

Tencent Holdings plans to more than double its stock buyback program to at least $12.8 billion in 2024, mollifying investors concerned about a gradual dissipation of growth during a Chinese economic downturn.

China’s largest internet company joins rivals from Alibaba Group Holding to JD.com in ramping up dividends or share repurchases, a symptom of maturity in businesses that once led the nation in growth. Tencent on Wednesday reported a lower-than-expected 7% rise in revenue after gaming sales disappointed, particularly at home.

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The results cast doubt over the growth trajectory of the world’s largest internet arena, which has yet to bounce back fully from years of regulatory and economic turmoil. Investors are grappling with mixed signals about the Chinese economy, which has struggled to regain its pre-Covid velocity. Beijing’s government is still contending with a plethora of structural problems from a  property crisis to stubborn inflation.

Revenue rose to 155.2 billion yuan ($21.6 billion) for the three months ended December, compared with the 157.4 billion yuan average forecast. Net income was 27 billion yuan, versus the 33.3 billion yuan projected. On Wednesday, Tencent said it was boosting its share buyback program to more than HK$100 billion ($12.8 billion) in 2024, and proposed raising its annual dividend by 42%.

Some of China’s biggest tech names have sought to ramp up shareholder returns after delivering mixed results.

Alibaba unveiled $25 billion in fresh stock repurchases following disappointing December-quarter sales, while JD.com’s $3 billion buyback program propelled its shares higher. Tencent’s closest gaming rival, NetEase, more than doubled its dividend payout from a year ago, after both revenue and earnings missed estimates.

What Bloomberg Intelligence Says

Tencent’s growth is set to normalise in 2024, though it should still deliver mid-teen earnings growth, driven by continued strength in short videos and AI-enhanced ads; underpinned by cost discipline and a stabilising regulatory environment. While Tencent continues to face medium-term structural headwinds, its revenue base is relatively well diversified, in contrast with its e-commerce peers.

– Robert Lea, analyst

Tencent faces its own challenges beyond macroeconomic uncertainties. While WeChat has proven a reliable growth driver after its short-video feed lured users and advertisers back from ByteDance’s Douyin, the company still needs to figure out where the rest of its sprawling business empire is heading.

It’s struggling to retain paid subscribers on its video and music streaming services, and its cloud computing arm is in the midst of a price war with Alibaba and JD, just as that unit was seeking to reach profitability.

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Once its bread-and-butter, Tencent’s games division is also seeking its next big hit.

Sales of new casual title Dream Star declined in recent months thanks to fierce competition with NetEase, but the highly anticipated Dungeon & Fighter Mobile could help pick up the slack after the action game won a long overdue license in February.

The urgency for new gaming hits comes at a time when Beijing is again potentially ramping up scrutiny over the sector. In December, the industry regulator spooked investors by proposing new curbs on gaming content and monetisation, including a cap on in-game spending it never specified. The watchdog has since signaled its intention to hear the industry out and possibly roll back some of the harsher edicts, though a final version of the rules has yet to be published after public consultation ended in January.

Tencent, however, has found an unlikely ally in ByteDance. The Shenzhen-based company has scooped up some talent and in-game assets from TikTok’s Chinese owner, after ByteDance curtailed its game ambitions, Bloomberg News has reported. Tencent also recently allowed Douyin creators to stream and reproduce content off its mainstay games, including Honor of Kings and League of Legends. That ended a years-long, unofficial ban on both sides around running content from a rival.

Longer run, Tencent joins much of the Chinese tech sector in exploring the potential of generative AI. Its in-house large language model, Hunyuan, is now integrated with a suite of products including search and online marketing. Alongside arch-foe Alibaba, the WeChat operator has also made multiple bets on domestic AI model startups, helping mint new unicorns like Baichuan and Minimax.

© 2024 Bloomberg

William Murphy

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