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Tencent: Dominating China’s Digital World

Gulf Brokers Ltd.

When exploring the social media spectrum for the first time, you are likely to register on Facebook, joining the 2.9 billion monthly active users of world’s most popular social media platform. Following The Big F in global recognition is video giant YouTube, messaging behemoth WhatsApp and trend-setting Instagram. It’s American social media platforms which dominate the globe, but tagging on to their tails are those of the Chinese.

Notably, Tencent Holdings dominated the social media space of China and other parts of Asia. Tencent is the world’s 8th largest firm and China’s most valuable corporation by a landslide. The multinational conglomerate is huge in the social media realm, with WeChat, QQ and Qzone among its flagship social media platforms.

These platforms are so prominent in China, with WeChat alone having more monthly active users than TikTok, Snapchat & Twitter combined. How has Tencent climbed up the social media ladder? And how has its nationally-admired social media platforms been performing recently?

Climbing Up the Ladder

The colossal empire of the Shenzhen-based, 24-year-old company specializes in a suite of tech-focused spheres other than social media, including video games, stream & cloud services, entertainment, education and healthcare. No wonder why Tencent’s market valuation is over $375 billion, as it established a compelling presence in the local & global markets it tapped into.

The success of Tencent’s social media business truly exhibited its adaptability with contemporary preferences and its capitalization on growing market trends. In 2000, it launched the MobileQQ mobile messaging platform, which turned out to be the profitability key for the company. Tencent turned its first profit just one year after the launch of MobileQQ since establishment in 1998, generating $1.2 million in profits on sales of $5.9 million.

Fast-forward to 2005, Tencent introduced Qzone; a multimedia social networking platform which impressively gained popularity in no time. Only 5 years later in 2010, Qzone became China’s largest social networking service with over 492 million users. The focus on social media did not stop there. In 2011, the company gave birth to one of the world’s most successful businesses of today; WeChat.

Back in the day, WeChat was a simple messaging app, but today, it’s nationally and globally recognized as one of the world’s “super apps”, accounting for 34% of China’s total data traffic. Over the years, the multi-purpose WeChat has spectacularly risen to the top of the podium, offering a wide array of services; payment, e-commerce, transportation and grocery shopping just to name a few. It’s evident that Tencent has effectively climbed up the social media ladder, but will it remain to be a dominating force?

Recent Performance

In the fourth fiscal quarter of 2021, the Chinese conglomerate had a tough time in achieving the standards set by Wall Street analysts. Tencent witnessed its slowest quarterly revenue growth since its initial public offering in 2004, generating 144.18 billion yuan ($22.62 billion) versus the 147.6 billion yuan expected, which marks a mere 8% year-over-year growth. Beijing’s regulatory scrutiny on the nation’s tech sector continued to create turbulence for not only Tencent, but all firms which operate under the technology & internet umbrella.

Tencent’s figures in the most recent fiscal quarter has been underwhelming to say the least. In the first fiscal quarter of 2022, Tencent’s profits tumbled on disappointing revenues across all major business segments, and social media was no exception. While monthly active users of WeChat jumped by 3.8% on a year-to-year basis to 1.29 billion users, Tencent noted that payment activity has diminished, amid the tenacious resurgence of COVID-19 in China.

According to Tencent, this has “negatively affected payment volume growth in categories such as transportation, dining services and apparel,” and as a result, the nationally-embedded WeChat will naturally endure a heavy blow. Tencent’s segment which includes the gaming business, generated an uninspiring 72.74 billion yuan ($10.84 billion), which marks a minimal escalation from the prior quarter a year earlier. How has all this reflected on the Tencent stock?

Technical View

As seen in the TradingView chart, the Tencent stock (OTCMKTS: TCEHY) has plunged in 2021, and is not looking too attractive when putting on a long-term lens. Nevertheless, the short-term trajectory is looking optimistic. Currently trading in the lower part of its yearly range with a price tag of $49.45, the stock rests between support levels near $42 and $46, and resistance levels by $55 and $63.

Technically the overall momentum remains mixed. For the key technical levels check out the above chart.

Bright Future?

The company has been doubling-up on its gaming segment, acquiring Poland-based 1C Entertainment, as well as expanded its presence in the United Kingdom by taking over Sumo Group. While the fundamentals of Tencent may be shaky, its investments and exciting endeavors say otherwise. The future success of the Chinese tech dominator is dependent not only on internal factors, but also on the general conditions of China. Should domestic COVID-19 restrictions prolong, imminent growth for Tencent might be off the table.

Written by Syam KP, Financial analyst of Gulfbrokers

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