Chinese tech giant Tencent (OTC: TCEH.Y) recently blinded investors with a large profit in the second quarter. Annual revenue rose 29% to 114.9 billion yuan ($ 16.2 billion), and estimated at 2.2 billion yuan.
Profit rose 37% to 33.1 billion yuan ($ 4.7 billion), and expectations rose 5.5 billion yuan. The adjusted profit, which excludes its investments and other one-time transactions, rose 28% to 30.1 billion yuan ($ 4.3 billion).
Those impressive growth figures indicate that Tencent companies are still stuck on all cylinders. They also suggest that President Trump’s recent threat to ban WeChat in the US – which will affect only a small percentage of its users – is not meaningful to his business. Let’s see how Tencent’s four core companies ran in the quarter, and if their share still has room to run after having nearly 60% rally in the past 12 months.
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1. Gaming company accelerates
Tencent’s online revenue rose 40% annually and accounted for 34% of its topline. That marked an acceleration in the unit’s 31% revenue growth in the first quarter, which already benefited more people running games in the COVID-19 lockdowns.
Tencent attributed the unit’s continued growth to robust sales of its top smartphone games, including Peacekeeper Elite en Honor of Kings, which easily offsets the continuing decline in its PC gaming business. It also continues to win overseas gamers with hit games like PUBG Mobile en Activision Blizzard‘s Call of Duty Mobile.
2. Social networking business is expanding
Tencent’s revenue for social networks, which come primarily from value-added services over WeChat (known as Weixin in China), QQ, Tencent Music (NYSE: TME), en Huya (NYSE: HUYA), rose 29% annually and accounted for 23% of its topline.
Image Source: Getty Images.
This marked an acceleration of their growth of 23% in the first quarter. Tencent attributed that growth to its acquisition of Huya in April, Tencent Music’s growth in music subscriptions, and higher sales of virtual items in its social network-based games.
WeChat’s monthly active users (MAUs) increased 6.5% year-over-year to 1.21 billion. QQ’s MAUs fell 8.4% to $ 648 million, but that decline was expected as more users switched to WeChat.
In the conference call, Tencent declared Weixin and WeChat were separate apps, and that the Trump administration’s order could only affect the US version of WeChat. According to Apptopia estimates, less than 2% of the daily active users (WeChat DAUs) are in the US. These overseas users are likely to generate less revenue than the Chinese users of Weixin, because the foreign version of WeChat shows fewer ads and has access to fewer Mini programs.
Online advertising business saw a slight decline
Tencent’s online advertising business, which sells ads through its social networks, mobile apps, and streaming media services, grew its revenue 13% annually and accounted for 16% of the company’s top line.
This marked a sharp decline in the unit’s growth of 32% in the first quarter, as it benefited from the increasing sales of video game, e-commerce platforms, and online education services during the COVID-19 lockdowns. Demand for Tencent’s social media ads remained robust throughout the second quarter, but that growth was offset by declining advertising revenue from Tencent Video.
That delay was disappointing, but Tencent’s advertising business is still growing at a much faster rate than that of older advertising platforms such as Baidu, SINA, en Weibo.
4. The fintech and cloud companies are going up again
Tencent’s fintech and revenue for business services – which comes primarily from WeChat Pay, its integrated wealth management services, and Tencent Cloud – increased 30% annually and accounted for 26% of its revenue. This marked an acceleration of the growth of 22% of the unit in the first quarter.
Tencent noted that its payment and fintech services generated more daily transactions, as well as higher values for each transaction. Tencent Cloud also gained more Internet and public customers during the quarter, but did not disclose exact growth rates. That extension could spell trouble Alibaba (NYSE: BABA), which competes with Tencent in both digital payments (through its subsidiary Alipay) and China’s Cloud Infrastructure Market.
The important takeaways
Tencent has not offered any guidance for the whole year, but analysts expect its turnover to increase 28%, with a profit of 29%. The stock has nearly 40 times no earnings this year, but the impressive growth of its four core companies probably justifies the premium. For now, investors should not worry too much about the Trump administration’s threats against WeChat. Instead, they should ignore the noise in the long run and focus on the tech giant’s growth potential.
