25 August 2019
Tencent is facing policy headwinds, but its core business remains strong. Photo: Reuters
Tencent is facing policy headwinds, but its core business remains strong. Photo: Reuters

Leading technology plays are having a hard time

Leading technology plays Sunny Optical Technology (Group) Co. Ltd. (02382.HK) and Tencent Holdings (00700.HK) encountered considerable selling pressure following the release of their interim results.

While Sunny Optical may face some structural challenges, Tencent should continue to enjoy a positive long-term outlook.

On the back of strong earnings growth, Sunny Optical had seen its share price soar to a peak of HK$175 in June this year, up 30 times from HK$5 in 2013.

Its market value reached nearly HK$200 billion and the stock was made a Hang Seng Index constituent in November last year.

The mobile phone camera maker continued to post sales and profit gains in the first half of this year, albeit at a much more moderate pace.

Sunny Optical posted sales revenue of HK$11.98 billion and a net profit of HK$1.18 billion in the first six months, up 19.4 percent and 1.8 percent respectively from the same period last year.

This is a far cry from its growth clips in the first half of 2017, when sales revenue rose 70 percent and net profit was up 149 percent.

The share price slumped 24 percent on Tuesday, wiping out more than HK$30 billion from its market value in a single day.

As the smartphone market has become saturated, growth prospects of suppliers like Sunny Optical will be limited.

Additionally, as phone camera technology becomes mature, rivals that offer almost the same quality at prices 20 to 30 percent lower are cropping up, threatening the stronghold of leading players like Sunny Optical.

For sure, the smartphone market is still huge, and new demand from the Internet of Things, robotics and other emerging industries are likely to bring fresh growth impetus. But the good old days of hypergrowth is not going to return any time soon.

The case of Tencent is quite different. The company reported a 30 percent growth in sales revenue and a 20 percent rise in net profit (non-GAAP) for the second quarter from the year ago.

The slower growth can be attributed to some policy headwinds.

For example, the People’s Bank of China has ordered all non-financial payment tools, including Tencent’s payment platform, to deposit their reserves to the government. That may cost Tencent billions of yuan in interest income per year.

Also, the State Administration of Press, Publication, Radio, Film and Television is going through an organizational restructuring. As such, it has suspended approvals for new online games. That has put a drag on the firm’s biggest revenue source.

Otherwise, the core business of Tencent remains strong. For instance, the all-important WeChat active user number increased by 9.9 percent to 1.058 billion year-on-year.

More importantly, the monetization of its more than 1 billion users is still at an early stage, and this could expand from games and advertising to things like financial services, new retail, and public services.

This article appeared in the Hong Kong Economic Journal on Aug 17

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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