(Bloomberg) -- Tencent Holdings Ltd.’s better-than-projected earnings affirmed investor hopes that China’s gaming industry has rounded a corner, though its numbers also revealed a consumer malaise stemming during a stubborn economic downturn.
China’s most valuable company posted a better-than-projected 82% surge in net income, after the summer blockbuster Dungeon & Fighter Mobile helped its core gaming arm bounced back from two successive quarters of decline. That buoyed expectations that China’s $40 billion-plus gaming arena is set for its best showing since a series of regulatory clampdowns chilled a once-thriving pipeline and drove investors to the sidelines.
Investors had been counting on a solid performance from the world’s biggest games publisher, which scored the biggest hit of the year with the May release of the Nexon Co.-produced DnF Mobile in China. This month, Tencent is preparing also to introduce Black Myth: Wukong, continuing a longstanding quest to refresh an aging games pipeline. Shares in Naspers Ltd., a major backer, rose as much as 2.7%.
On Wednesday, Tencent Chief Strategy Officer James Mitchell called DnF their “next evergreen hit,” suggesting the company hopes it will join the likes of Honor of Kings in Tencent’s stable of cash-cows. But executives sounded a note of caution about the cyclical nature of the industry and increasingly innovative competitors.
“The traction is quite nice. But let’s not lose sight of the fact that we’ve seen a very challenging business environment in the past couple of years,” President Martin Lau told analysts in post-results briefing. “That’s the nature of the gaming business. It’s increasingly difficult to come out with very successful new titles these days, because the quality and expectations for games is very high.”
Tencent indeed faces unusually strong competition this summer. NetEase Inc. and Genshin Impact studio Mihoyo both unveiled games that’ve gathered strong initial momentum against their deeper-pocketed rival. NetEase’s Naraka: Bladepoint scored 4.14 million downloads on Apple’s iOS in China over its first two weeks, almost on par with Tencent’s marquee hit, according to market intelligence firm Sensor Tower.
Tencent is the first major Chinese tech corporation to release earnings for the June quarter, at a time the country is grappling with economic challenges from a property crisis to high youth unemployment. The fintech and cloud services division — the biggest business — grew a disappointing 4%, reflecting both consumer and corporate belt-tightening in a volatile Chinese economy. That was reflected in a slowdown in payments through its widely used WeChat app.
Alibaba Group Holding Ltd. and JD.com Inc. report Thursday, and their businesses are also considered susceptible to fluctuations in consumer sentiment.
For a live blog of the numbers, click here.
Tencent’s gross margins mainly improved across the board, thanks to the super-app WeChat which channeled a billion-plus users to services from mini-games to advertising and video shopping feeds.
Online advertising surged 19%, helping underpin margins. Net income surged to 47.6 billion yuan, compared with the estimated 39.9 billion yuan. Revenue jumped 8% to 161.1 billion yuan ($22.5 billion) for the April-June period, versus the projected estimate of 161.4 billion yuan.
“Domestic games resuming growth is highly positive and given the success of recent new title launches, growth could reach double digits in the third quarter,” said Vey-Sern Ling, UBP Senior Equity Advisor. “Games continue to be Tencent’s most important profit driver and growth acceleration bodes well for the share price.”
What Bloomberg Intelligence Says
Tencent’s strong 2Q margin beat heralds further EPS upgrades, with momentum set to continue into 3Q. Adjusted operating margin of 36.3% was 220 bps above consensus, driven by solid growth in video games, ads and short videos. Fintech’s top-line slowdown was anticipated, with a mix-shift driving a margin beat in the division. Adjusted operating profit beat by 7%, with low taxes driving the better EPS.
We expect Tencent to continue playing the “long game” in AI and believe its business remains well-placed to emerge as a longer-term winner, alongside Alibaba, Bytedance and Huawei. Baidu’s first mover-advantage in AI will likely be further eroded.
- Robert Lea and Jasmine Lyu, analyst
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Executives also fielded several questions about how artificial intelligence investments will contribute to future growth. They reiterated that AI was a technology they would continue to explore and integrate with existing services, when ready.
So far, AI has helped improve ad targeting, but the firm’s proprietary large language model and ChatGPT-style tool have lagged competitors like TikTok parent ByteDance Ltd. and Alibaba in user uptake. Still, both Alibaba and Tencent have invested in the majority of China’s up-and-coming model builders, an elite group of six startups that have collectively attracted billions of dollars of venture funding.
On the topic of buybacks, executives said they will persist with their originally announced plans and “had no update” for now.
Tencent has spent almost $8 billion this year to repurchase its stock, according to a Bloomberg News calculation, outpacing the buyback activity of other Hong Kong-listed firms as the local market sagged. Shares of the WeChat operator surged roughly 27% this year, versus a 10% drop in the Hang Seng Tech Index.
--With assistance from Vlad Savov, Peter Elstrom, Debby Wu and Henry Ren.
©2024 Bloomberg L.P.
