Tencent investments push profits up 65 per cent in first quarter, as gaming and fintech units grow with Beijing scrutiny
- China’s biggest social media and gaming company pulled in US$7.4 billion in profit and US$21 billion in revenue, beating estimates
- Tencent says it is increasing investments this year and is bullish on China’s digital currency despite antitrust scrutiny from Beijing and multiple fines
The Hong Kong-listed company reported a profit of 47.8 billion yuan (US$7.4 billion) in the quarter ended March, compared with 28.9 billion yuan in the same period of 2020 and above consensus expectations of 34.4 billion yuan. Revenue reached 135.3 billion yuan, a rise of 25 per cent, compared with 108.1 billion yuan last year. It was more than the 133.8 billion yuan consensus estimate from 25 analysts compiled by Bloomberg.
“The numbers are quite satisfactory, but I can only say that it meets expectations,” said Shawn Yang, Shenzhen-based managing director of Blue Lotus Capital Advisors. “The fintech and cloud sector is better than I expected, considering the entire cloud industry has slowed down a bit this quarter in the post-pandemic period.”
While Tencent’s core business units saw strong growth for the quarter, its various investee companies helped make this a banner quarter for profits. Company president Martin Lau also promised more investment activity going forward.
“The most important driver [of our investment activity] is that we have seen an acceleration of market trends, which include the businesses that are moving online,” Lau said during the earnings call on Thursday. “And we’re seeing an expansion in terms of game users, and also the next stage of the short-video content growth.”
Tencent CEO Pony Ma Huateng emphasised the company’s success in these two areas.
“During the first quarter, we delivered solid growth across our businesses while continuing to enhance our products and services,” Ma said in a statement. “We are stepping up our investment in areas including business services and enterprise software, high-production-value games, and short-form video.”
The tech giant’s shares rose 0.25 per cent on Thursday ahead of the earnings announcement, closing at HK$609 (US$78).
The company’s continued growth comes at a sensitive time for Tencent, which has become a target of China’s antitrust efforts as the government cracks down on Big Tech.
In the last five months, Tencent and its subsidiaries have been hit with five fines totalling 2.5 million yuan.
“Industry-wide antitrust regulation should have a limited impact on Tencent,” Ella Ji, managing director at China Renaissance Securities, wrote in a recent note.
In gaming, which accounted for a third of Tencent’s revenue in the first quarter, the biggest challenge is not regulatory oversight, according to Ji, but competition.
“Although Tencent produces and distributes top games in both China and the global markets, and in our view, is not as impacted by the antitrust regulations as its peers, the competition among licensed games remains intense,” Ji said.
Revenue from Tencent’s gaming business reached 43.6 billion yuan last quarter, up 17 per cent compared with the same period last year. This was owed largely to global revenue growth in mobile gaming, which saw a year-on-year increase of 19 per cent to 41.5 billion yuan. PC gaming revenue was up 0.8 per cent to 11.9 billion yuan.
Another important area of growth for the tech giant is fintech and business services, including cloud, Tencent’s fastest-growing business segment last quarter, with revenue growing 47 per cent to 39 billion yuan. The company credited the growth partially to recovery from the impact of the Covid-19 pandemic last year, which kept consumers at home, and further adoption of mobile payments.
Tencent is one of China’s largest fintech players. The company’s WeChat Pay, which runs inside its ubiquitous social messaging app, is one of the country’s top two mobile payment services. WeChat had a total of 1.24 billion monthly active users at the end of March.
What makes Tencent such a tech goliath?
“There’s quite a bit of focus on making sure that there’s not going to be systemic risk,” said Lau, adding that the focus of regulators appears to be on over-lending and over-borrowing. “We are very focused on compliance with risk management, where there is self restraint in terms of the size of our non-payment financial products, especially on the lending size.”
“We have already talked about it before in that WeBank is actually a participant within the trial for digital currency, and we will be developing it in order to get WeBank to support that,” Lau said, referring to the internet-only bank backed by Tencent.
The scrutiny of fintech is part of a broader Big Tech crackdown that kicked off with investigations late last year, resulting in several fines months later.
China Renaissance’s Ji expects fintech and cloud applications to accelerate as offline businesses and transactions rebound from the pandemic.
Advertising is also recovering along with consumer demand, as Chinese companies become more comfortable increasing their spending on marketing again. Tencent reported 21.8 billion yuan in revenue for ads, up 23 per cent for the quarter, driven by social ads on WeChat’s Moments, a feature similar to Facebook’s News Feed.
“We believe the improved [WeChat] ecosystem should eventually enhance user time spend, enlarging Tencent’s addressable ad market,” He Saiyi, an analyst at Huatai Financial Holdings, wrote in a note last week.
The Shenzhen-based company is also reshuffling its video units by merging them to better compete against rivals.
In April, Tencent Video, the company’s Netflix-like video subscription platform, and short-video service Weishi were combined into a new online video operation under its platform and content group (PCG), one of its six business units.
“We‘ve had some hits globally that were developed in China, including PUBG Mobile … which gives us more confidence to step up our rate of investment,” said Tencent chief strategy officer James Mitchell. He added that the company is looking at investing more in marketing and publishing, along with experimental games and “frontier technologies” like cloud gaming.
So far this year, Tencent has invested in or acquired more than 50 game-related companies, five times their total in 2019 and up 60 per cent from last year, according to Niko Partners.