China stock market

Reversal of fortune: Tencent and Chinese tech stocks are crashing on profit squeeze

The biggest tech stocks have tumbled at least 10 per cent this year, versus a 98 per cent gain for 2017

PUBLISHED : Thursday, 16 August, 2018, 2:18pm
UPDATED : Thursday, 16 August, 2018, 5:20pm

Tencent Holdings and other Chinese technology stocks trading in Hong Kong are suffering a reversal in fortune this year, turning from market darlings to underperformers.

After soaring at least 98 per cent in 2017, Tencent, Sunny Optical Technology Group and AAC Technologies Holdings have fallen out of favour among traders, retreating at least 10 per cent this year to trail the performance of the benchmark Hang Seng Index.

The sell-off was fuelled by the disappointing results of the industry’s biggest players in the latest earnings season. Tencent, China’s biggest social-media company running businesses from gaming to online payment, posted its first drop in quarterly profit since 2005 on Wednesday. Two days earlier, Sunny Optical, the nation’s largest maker of camera modules and lenses for smartphones, posted a sharp fall on profit margins and lower-than-expected earnings.

After a decent run-up in share prices last year, their valuations have expanded too quickly and they are now being fixed
Wang Chen, Xufunds Investment Management

“The trouble is brewing in the sector and the problems facing the companies are that either they hit a bottleneck in growth or the competition is getting fiercer,” said Wang Chen, a partner with Xufunds Investment Management in Shanghai. “After a decent run-up in share prices last year, their valuations have expanded too quickly and they are now being fixed.”

Tencent profit drop blamed on wait for new games approval

Tencent dropped 3 per cent to close at HK$325.80 on Thursday, on course for a 20 per cent decline for the year. The company was valued at 51 times estimated earnings in November last year, the most expensive level in almost eight years, after a 114 per cent jump in the stock, according to weekly data compiled by Bloomberg. The multiple was recently at 32.7 times, matching its 10-year average, the data showed.

Sunny Optical fell 1.4 per cent to HK$89.75, and is set to drop 10 per cent this year. At the peak, the company was trading at 49.7 times projected earnings in 2017, before the valuation was slashed by more than half to the current level. AAC Technologies, a maker of acoustic equipment, is heading for an annual loss of 40 per cent after a 0.9 per cent decline on Thursday.

Tencent's share plunge could be start of sell-off in China's tech sector

Tencent’s second-quarter profit decreased 2 per cent from a year earlier to 17.8 billion yuan (US$2.6 billion), missing estimates of analysts surveyed by Bloomberg by 7.5 per cent. The drag on profit came from the 19-per cent revenue drop in its mobile-gaming business after Chinese regulators suspended approval of new games in March in an intensified clean-up of online content.

The crackdown has shown no sign of easing as Tencent was forced to pull Monster Hunter: World , a popular video game, from its gaming platform just days after its launch.

Sunny Optical reported a decrease of two percentage points in net profit margin, though profit rose by a marginal 1.8 per cent in the first half. AAC Technologies is expected to release its quarterly results next week. Profit growth for three months ending in June probably slipped to 2.8 per cent from 6.1 per cent in the previous quarter, according to Bloomberg data.

“At least for the short term, the sector will probably endure more pain because of the ups and downs in earnings,” said Wang of Xufunds.