8 Things to Know About Tencent Holdings Quarterly Earnings

Tencent Holdings Ltd (HKG: 0700) is the undisputed leader of the social media sector in China. With a market capitalisation of HK$4.02 trillion or roughly US$520 billion, the social media and gaming giant is among the world’s top ten largest companies. 

The company share price fell 20% in the first quarter of 2020 as the stock market reacted to the Covid-19 outbreak. Since then, its share price has rebounded by about 30%. 

In this article, we take a closer look at Tencent’s latest quarterly earnings, its key business segments, growth prospects, and potential risks. 

Tencent’s Key Online Platforms. Source: 2020 First Quarter Results Presentation

Headline Figures

Tencent reported a net profit of RMB29.8 billion in quarter one results, 6% higher year-on-year. 

Revenue increased by 26% to RMB108.1 billion. This is largely due to much higher revenue from the online games segment. 

Source: 2020 First Quarter Results Presentation

Online Games The Key Revenue Contributor

Online Games is the largest revenue segment as it contributed 35% of the quarter’s revenue. It registered a 31% growth as Chinese residents played more games during the stay-at-home period amidst the Covid-19 lockdown. Monetisation rate improved with higher spending on in-game purchases. 

However, management cautioned that the high growth from online games is unlikely to persist as life returns to normalcy in China after lockdown. I hope to see Tencent reduce its reliance on online games as the sector’s growth slowed down since the Chinese government clamped down on excessive gaming two years ago. The future growth engine would come from the industrial internet, which is represented by the Fintech and Business Services segment. 

Fintech and Corporate Services Touted as Future Growth Engine

The Fintech and Corporate Services segment covers the mobile payment, wealth management, and cloud services. This is the crucial part to watch as Tencent shifts its focus from connecting people to connecting enterprises and services in its drive to digitalise traditional businesses. Revenue from this segment increased by 21.5% to RMB26.5 billion.

However, the overall slowdown in business activities due to the pandemic dragged revenue lower quarter-on-quarter. Cloud services were impacted by lower new accounts, while FinTech services saw lower offline commercial transactions and cash withdrawals. 

Covid-19 A Shot In The Arm for Tencent’s Online Services

Tencent’s first-quarter performance benefited from the Covid-19 outbreak. The most direct beneficiary is the Online Games segment as shared earlier. 

The pandemic also accelerated the major trend of business digitisation as companies rethink their operations and business continuity plans. This has a far greater impact on Tencent’s future growth in enterprise online solutions. 

I feel that Tencent has capitalised this opportunity well. Its video conferencing app, Tencent Meeting, had amassed more than 10 million users since its launch in Dec 2019. WeChat Work, its business communication tool, signed up more accounts in the retail, education, and public sectors that had grown its active users significantly. 

Tencent’s Industrial Internet Strategies. Source: Corporate Overview Presentation

Online Advertising – Surprise Bright Spot

While I expected the Online Advertising segment to be weak due to lower advertisement demand from businesses and corporate clients, revenue surprisingly grew 32% to RMB17.7 billion. 

Games, internet services, and online education sectors placed ads on Tencent’s various social media platforms centred around WeChat and QQ to reach the stay-at-home users directly. As a result, Social & Others Ad revenue grew 47% and this outweighed the 10% drop in Media Ad revenue 

This highlights the key strength of Tencent’s Online Advertising business – the ability to meet the needs of different sectors supported by its wide array of customer touchpoints with massive subscribers and users. Underlying this strength is the ever-growing pool of active users from its core social media and subscription services: WeChat (Weixin) with 1.2 billion Monthly Active Users (MAUs); QQ with 690 million smart devices MAU; and fee-based subscriptions with 197 million subscribers. 

Tencent’s Social Advertising. Source: Corporate Overview Presentation

WeChat Mini Programs Registered strong growth

Mini Programs’ daily active user base exceeded 400 million as of Mar 2020. It exploited the Covid-19 pandemic well by introducing new functions to meet different user needs during the stay-at-home period. For example, teachers can now customise the relevant mini-program with online exams and homework collection tools to better manage online lessons. The QQ School-plus-Home groups have become the primary e-learning platform for tens of millions of teachers and students. 

I feel that Mini Programs was a masterstroke by Tencent that further evolved the-already-indispensable WeChat into an all-encompassing work and live tool. It allows enterprises and services to reach the masses through placing a light-weight, user-friendly app within an app. The result is the expansion of WeChat’s usability beyond messaging, payment, and social connection to many other scenarios. It even turned WeChat into a dynamic e-commerce tool popular with small businesses in China’s less-developed areas. 

The success of Mini Programs also reinforced other revenue streams. Synergy was attained when it increased WeChat’s user stickiness and strengthened the Online Advertising business. 

Investment in Associates

Tencent is an active global investor in the media, entertainment, gaming, and e-commerce sectors, among others. It holds equity stakes in both start-ups and established players to broaden user reach and capture emerging opportunities. Examples include stakes in JD.com, China’s second-largest e-commerce player; Spotify, the global music streaming giant; Gojek, Indonesia’s super app; Sea Ltd, Singapore’s home-grown gaming and e-commerce firm, and many others. As of Mar 2020, its investment in associates is worth RMB224 billion. 

Tencent’s approach to associate investment is to invest and advise as opposed to complete buyout. It adopts a philosophy of partners’ empowerment to reap long term rewards in enriching its product and services ecosystem. 

Competition in Gaming and Social Network

Tencent faces keen competition from other major internet firms.

ByteDance, the world’s most valuable start-up, is a serious contender in online advertising and short video content. Its TikTok app features whacky short videos that retain users on its platform for a long period. This has chipped away WeChat and related platforms’ user screen time that could undermine Tencent’s Online Advertising business. ByteDance is also entering the video games market targeting both overseas and domestic players. 

In cloud computing and corporate internet, Tencent is in the second position behind Alibaba. The latter is China’s largest cloud service provider with a 46% market share.  

Conclusion

Tencent has become an indispensable component of China residents’ daily life. A person living in China can hardly go a day without using Tencent’s suite of products and services. This has given the company a stronghold on the multiple sectors that it operates in.

Nevertheless, it faces an uphill task of maintaining its lead over competitors and continuously innovating to sustain future growth. There is still large potential in areas such as cloud computing, digitalisation of small businesses, and e-commerce.

However, Tencent must defend its key moat of absolute leadership in the social connection arena through WeChat and QQ. The vast user base and the ensuing online traffic is the foundation of Tencent’s business scale and consumer reach that is crucial to its survival. 

Up till now, I believe there is no credible competition for WeChat and QQ yet. Hence I think that Tencent’s foundation is still strongly intact.

The decision of investing in Tencent is then a relatively simple one, which is to buy it at the right price. And I leave it up to you what is a comfortable price to pay for this company.

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