China’s internet sector is home to some of the country’s biggest and most dynamic companies, and has been at the forefront of the economy’s shift to consumer-led growth.

But some of the biggest names in the sector have come under pressure recently, raising questions over whether their long term rally is running out of steam.

Shares in Tencent, the online gaming and social messaging giant, have lost more than $180 billion in market value from a record high in January. On Wednesday, the company reported its first year-on-year drop in net profit in 13 years (albeit due to one-off considerations) and said the timeline to secure regulatory approval (and the ability to monetise) some of its newest games was uncertain.


For Tencent, it was a disappointing set of results that sent the stock down further. Shares in Naspers, the South African media and internet company that owns a third of Tencent, also fell. The concern for investors is that it could have broader implications for market sentiment. Just as the resilience of the US market has largely been riding on the FAANGs (Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet), in China it is BAT (Baidu, Alibaba and Tencent) that often lights the way. Add in TSMC and Samsung Electronics, and Asia’s so-called BATTS account for 17.6% of the widely tracked MSCI Emerging Markets Index.

However, a closer look at the numbers suggests Tencent’s fundamental growth story remains unchanged, and is closely linked to the strength of modern Chinese consumption trends. Across China’s internet sector, as valuations have returned to less challenging levels, active asset managers may start to see new potential entry points.

Source: Questmobile, Fidelity International, July 2018

One billion users

Tencent is a member of a very small club of companies that can claim a billion users: combined monthly active users of its Weixin and WeChat messaging platform rose 9.9 per cent in the quarter to 1.057 billion.

The slowdown reflected in the quarterly results appears to be due to delays of online game approvals, which were the result of a reorganisation of relevant regulatory divisions in China earlier this year.

Games like Honour of Kings or the newer PlayerUnknown's Battlegrounds (PUBG) are wildly popular. Time spent on games, number of people playing and other such indicators remain solid, which suggests this is a short-term issue rather than structural.

Tencent’s ecosystem remains strong and vast, as the leading social, entertainment and media platform in China with a presence in online payment and cloud- these are the company’s longer-term growth drivers.

Of course, stocks at higher valuations often see volatility in the shorter term. It is important that investors look to understand the key drivers for a business, in order to decide whether these short term movements present an opportunity or a threat.

Gary Monaghan

Gary Monaghan

Investment Director, Asia ex-Japan Equities