Author: Tronserve admin
Tuesday 27th July 2021 02:39 PM
Tencent Posts Better-Than-Expected First-Quarter Earnings on Strong Gaming Growth
Internet giant Tencent Holdings is predicting a sweeping structural change across China’s industrial landscape in the aftermath of the Covid-19 pandemic, with more enterprises expected to broaden their online operations.
Shenzhen-based Tencent, which runs the world’s biggest gaming business and China’s largest social media platform, already showed the resilience of its own online operation, as it posted on Wednesday a better-than-expected 6 per cent increase in first-quarter net profit on the back of its gaming activities.
“The biggest structural change for businesses and organisations is to realise they need online presence,” Tencent president Martin Lau Chi-ping said in a conference call with analysts, hours after reporting its earnings for the March quarter. “When everything is physically shut down and offline, it’s very important for businesses to have online access to their consumers and other internet users.”
China’s government is expected to increase investment in cloud infrastructure and other relevant technology to push that change, according to Lau, citing potential opportunities in online education and health care.
Such a move across a range of industries comes as China deals with an uneven recovery of its economy, which shrank for the first time since 1976 in the first quarter of this year amid extensive shutdowns to contain the spread of the coronavirus.
Tencent is considered one of the few beneficiaries of the pandemic, as millions of people in lockdown turned to games, cloud services, collaborative tools and other online services for entertainment, education or work.
At the height of the coronavirus outbreak in the first quarter, Tencent met the needs of a vast number of people who stayed at home and had more time for games, video and other internet services, according to Lau.
A return to normalcy across China happened “by and large in April”, said Lau, adding that everything was basically back to normal after the May 1 holiday.
Still, Tencent warned of further challenges even as China’s economy reopens. In its regulatory filing after the market closed on Wednesday, Tencent said it expected “in-game consumption activities to largely normalise as people return to work”, but also projected “some headwinds for the online advertising industry”.
The company posted a net profit of 28.9 billion yuan (US$4.1 billion) in the March quarter, up from 27.2 billion yuan in the same period last year and ahead of market analysts’ consensus forecast of 23.6 billion yuan.
That growth was mainly attributed to its value-added services (VAS) business segment, comprising online and mobile games, which rose 27 per cent to 62.4 billion yuan.
Revenue was up 26 per cent to 108.1 billion yuan, from 85.5 billion yuan a year earlier, beating the consensus estimate of 101.1 billion yuan from a Bloomberg poll of 21 analysts.
“So far, our businesses have proved resilient,” said Pony Ma Huateng, chairman and chief executive of Tencent, in a statement on Wednesday. “During this difficult period, we seek to provide online services that keep people connected, informed, productive and entertained.”
Ma also indicated that the company will allocate time and resources, including more than 2 billion yuan of donations, to contribute to Covid-19 relief initiatives in China and globally.
Tencent shares, which have surged over 10 per cent since late January despite a global market rout, was virtually unchanged at HK$429.60 on Wednesday’s close before the earnings were announced.
The rise in Tencent’s VAS business primarily reflected major contribution from domestic smartphone games such as Peacekeeper Elite and Honour of Kings, as well as higher contribution from titles for its overseas market, including PUBG Mobile and Clash of Clans. That was partly offset by lower revenue from personal computer client games such as Dungeon and Fighter.
James Mitchell, chief strategy officer at Tencent, said there was currently a two-month lag between the video games market in China and overseas, where many economies are still under different stages of lockdown in efforts to curb the spread of Covid-19. “There may be some consumers who are concerned about unemployment risk, which may mitigate their in-game spending,” he said.
“Looking forward, we expect the rest of the world to return to normal as China has done,” Mitchell said. “We are in a fortunate position of continuing to launch games globally during this period and have received a positive reception from hard core gamers.”
Revenue from Tencent’s financial technology and business services segment grew 22 per cent to 26.5 billion yuan in the March quarter. That was attributed to the firm’s commercial payment and wealth management platform, as well as greater contribution from cloud services.
Still, Tencent said revenue from fintech services decreased quarter on quarter because payment activities, especially offline transactions, and cash withdrawals were reduced during China’s extended Lunar New Year break and stay-at-home period. Signs of recovery, however, were seen in the last week of April, when average daily commercial transactions value recovered to late 2019 levels.
Tencent said it expected the cloud industry to “remain challenging in the short term”, based on delayed project deployment and new accounts acquisition for Tencent Cloud amid the pandemic.
“The good thing is China’s economic activities have rebounded quite nicely,” Lau said. He indicated a lot of the delayed projects to get restarted, but expected enterprises to take some time in putting these into production. Since these organisations have gone through the Covid-19 shutdown, Lau said he was optimistic that the digital infrastructure plans of these customers would push forward.
In the first quarter, Tencent’s revenue from online advertising remained strong, rising 32 per cent to 17.7 billion yuan. Social and other advertising revenue grew 47 per cent to 14.6 billion yuan, which mainly reflected higher sales from the company’s mobile advertising network and Weixin Moments. Combined monthly active users on its WeChat and domestic Weixin social media platforms totalled 1.2 billion, up 8.2 per cent from a year ago.
Media advertising, however, decreased 10 per cent to 3.1 billion yuan, owing to lower revenue from Tencent’s video and news platforms as a result of weak macroeconomic conditions and the suspension of sports events.
A big chunk of media advertising comes from multinational brands, which are either reviewing or reducing spending globally, according to Mitchell. “So you should expect media advertising revenue to be under pressure in the second quarter,” he said.
"So far, our businesses have proved resilient
Pony Ma, chief executive of Tencent
“Tencent should sail through China’s coronavirus outbreak relatively unscathed as most of its businesses have minimal touchpoints with the physical world,” said Ling Vey-sern, senior industry analyst at Bloomberg Intelligence. He expected Tencent’s online game business to continue expanding in 2020 after a 31 per cent jump in the first quarter, “the quickest pace in two years”.
“Despite tough rivalry and macroeconomic headwinds, the company’s social ad sales should continue to outgrow the broader industry due to WeChat’s 1.2 billion highly engaged users and low inventory utilisation,” he said.