Goldman Sachs sees recovery in Tencent’s games revenue but ad growth to remain sluggish

  • TECH
  • Monday, 29 Jul 2019

In the first quarter Tencent reported a 2% year on year decline in mobile games revenue to US$3bil.

Chinese tech giant Tencent Holdings should see its games growth recover in the second quarter thanks to multiple new titles being released since the resumption of license approvals, but advertising revenue growth will be sluggish due to intense competition, according to a report from Goldman Sachs.

The investment bank maintains a “Buy” rating on the stock and expects mobile gaming revenue growth to recover to 23% year on year in the second quarter. In the first quarter, Tencent reported a 2% year on year decline in mobile games revenue to 21.2bil yuan (RM12.68bil) due to fewer new titles being released in the period.

The newly released game Peacekeeper Elite has maintained healthy user growth since its debut in early May, according to iResearch. On June 20, Tencent announced that the number of daily active users of Peacekeeper Elite had exceeded 50 million in less than two months since its launch.

“We believe the strategic focus for the game at the current stage is still enhancing user experiences and maintaining the retention rate, with less ï¬پnancial impact in the near term due to deferred revenue recognition,” Goldman Sachs’ Piyush Mubayi said in the report.

Growth in China’s gaming industry stalled last year amid a regulatory crackdown on internet content and efforts to stem gaming addiction, with Chinese authorities suspending the licensing process for new games for nine months, restarting it in December.

The central government has blamed mobile gaming for contributing to myopia among the nation’s youth, while policymakers have accused gaming companies of peddling products that are as addictive as opium.

While Tencent’s online and mobile games operation remained its biggest revenue contributor, first-quarter sales growth was primarily driven by payment and other financial technology (fintech) services, as well as advertising, according to the company’s first quarter results.

Fintech and business services, a segment that Tencent has decided to report for the first time, accounted for 25% of total revenue with sales of 21.8bil yuan (RM13.04bil). This segment grew on the back of increased demand for payments and cloud computing services in the first quarter.

Goldman Sachs forecasts continued robust growth of fintech and business services revenue in the second quarter, up 51% year on year to 24.8bil yuan (RM14.83bil).

However, the investment bank remains cautious on advertising demand in the industry and expects increased competition for ad budgets to add pricing pressure.

“Into the second half year of 2019, we expect merchants to remain cautious on online advertising budgets amid uncertain macroeconomic outlooks and tight regulatory scrutiny in a few key verticals such as health care and ï¬پnancials, while the scaled up monetisation at other industry players such as ByteDance further intensiï¬پes the competition and suppresses prices,” the report said. – South China Morning Post

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