Tencent Relief Rally Likely

Tencent's (0700) 3Q results are probably best described as not worse than feared, rather than consensus beating. While a 29.6% on-year rise in net profit to CNY23.33 billion handily smashes already revised-down forecast, it was boosted by a windfall of CNY8.8 billion from investment gains, which the market will likely continue to view as one-off. Non-GAAP earnings rose a more subdued 15.5% to CNY19.71 billion, while revenue grew at its slowest pace in three years.

Overall, there likely to be small relief rally. That's short-term view. Longer term though, Tencent's business trends are turning positive. Firstly, 3Q mobile gaming revenue rose 11% vs 2Q, likely above low-to-mid single-digit percentage sequential growth anticipated by analysts. Ads also show positive momentum, with total ads revenue up 47% on year to 20% of Tencent’s total revenue. Tencent also for the first time revealed its cloud revenue, which more than doubled in 3Q, amounting to CNY6 billion in the first three quarters.

Bears, especially those with short positions, perhaps should exercise caution, as after all Tencent shares have fallen a whopping 43% from its all-time high of HK$476.6 in January. Short-covering could potentially provide fast and furious share-price rally, in the short run.