Tencent Sales Top Estimates in Sign the Gaming Boom Persists
(Bloomberg) — Tencent Holdings Ltd.’s revenue rose a better-than-expected 29% and earnings beat analysts’ projections as the Chinese online gaming giant rode a pandemic-era gaming boom that’s persisted in defiance of an economic downturn.
The strong results should help reassure investors scrambling to assess the fallout from Beijing’s broadest attempt yet to rein in the country’s giant internet sector. Chinese regulators unveiled detailed guidelines Tuesday to curtail anticompetitive practices among digital platforms just a week after new restrictions on digital lending triggered the suspension of Ant Group Co.’s $35 billion initial public offering.
Tencent pledged to work with Beijing and control an expansion into the fintech arena to ensure it remains compliant. Company President Martin Lau told analysts on an earnings conference call Thursday that the company will continue to maintain a prudent strategy and that the envisioned antitrust rules tend to focus more on transaction-based platforms than on Tencent’s core business of social media and gaming.
Sales in the three months ended September rose to 125.45 billion yuan ($18.9 billion), beating the 123.8 billion yuan average forecast. The world’s largest gaming company reported net income of 38.5 billion yuan, surpassing projections of 30.3 billion yuan after it recorded a gain of 11.6 billion yuan from rising valuations for its tech holdings. Shares in top shareholder Naspers Ltd. and its unit Prosus NV climbed roughly 4%.
“Games were way ahead of expectations,” said Daiwa Capital Markets analyst John Choi. “This is important as it is the most profitable part of the business within Tencent.”
Tencent shares climbed 4.7% Thursday, recovering partially from a $290 billion selloff among Chinese tech titans led by Alibaba Group Holding Ltd. The WeChat operator’s main business of video games is perceived as less vulnerable in any potential crackdown than the operations of its e-commerce and fintech peers.
Tencent’s fintech business — valued at $200 billion to $300 billion before Ant’s IPO derailment — has become one of its fastest-growing divisions. Together with cloud computing, the fintech and business services segment generated almost $15 billion, or a quarter of total revenue in 2019. The bulk of that was from commercial payments facilitated by the WeChat super-app, where a billion Chinese schmooze, shop and share cabs.
“In the face of public health, macroeconomic and geopolitical challenges, we will seek to sharpen our focus, innovate, and collaborate with our partners,” the company said in its filling.
Revenue from Tencent’s core gaming and entertainment business surpassed expectations, suggesting the internet resurgence during Covid-19 still has legs. The Value-Added Services Business — which includes gaming — posted a better-than-projected 38% surge in revenue to 69.8 billion yuan. Online game revenues grew 45%, the fastest pace since 2017, while social network revenues increased 29% after the consolidation of game-streaming giant Huya Inc.
That’s despite signs of peaking in-game spending globally. Tencent is also fending off stiffening competition from the likes of TikTok-owner ByteDance Ltd. and grappling with global macroeconomic uncertainty that continues to depress advertising. Ad sales grew faster during the September quarter, thanks to big web-series releases and WeChat’s new ad slots.
Excluding the one-time gain, net income would have fallen in line with or below estimates. Tencent was a major beneficiary of the tech rally during the September quarter, given its ownership of some of the world’s largest tech players from JD.com Inc. and Meituan to electric vehicle maker Nio Inc. and online real estate platform KE Holdings Inc.
Tencent has charted a lineup of new titles for the next year to shore up a slate that now revolves around aging franchises Peacekeeper Elite and Honor of Kings. In October, its Riot Games unit started testing League of Legends’ highly anticipated mobile version in Asia. Yet another potential hit, Mobile Dungeon&Fighter, has been delayed since August while developers implement an anti-addiction system required under Chinese law.
“The launch time of the flagship game ‘DnF’ has yet to be determined, but we believe the new games in 4Q20 should boost revenue,” Bocom analysts led by Connie Gu wrote before the earnings report. “Offline payment and cloud are gradually recovering to normal, while Fintech product expansion is set to drive segment valuation growth in the long term.”
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