The rapid growth of video advertising on WeChat has boosted Tencent’s profits, signaling that Chinese consumers are turning to social media and gaming despite the national recession. Tencent, the operator of WeChat, reported growth across all divisions, including games, advertising, and fintech, resulting in a 10% increase in revenue to 154.6 billion yuan ($21.4 billion) in the September quarter. Although net profit fell 9% less than expected, it reflected increased content spending and a significant one-time gain in the previous year’s quarter. Tencent’s shares also saw a more than 6% increase in Europe.
These results come as a relief amidst concerns that China, the world’s largest internet market, has lost momentum due to regulatory and economic turbulence. The data suggests that spending on lower-cost and leisure activities remains resilient, despite contractions in segments ranging from luxury to international travel. There were fears that the Chinese economy may enter a deflationary spiral, fueled lower-than-expected spending on e-commerce platforms during this year’s Singles’ Day shopping festival.
Notably, Tencent’s online advertising division experienced the most growth, with a 20% increase in revenue. This was partly driven the growing engagement of users with WeChat’s video accounts, which saw a 50% increase in total views during the quarter. This is positive news for Tencent, as the company has faced accusations from ByteDance Ltd., the owner of TikTok, regarding online media.
The company’s gross margins have approached 50%, reaching levels not seen since 2018. Adjusted net profit, excluding exceptional items, increased 34%. Despite having already distributed approximately $24 billion to investors this year, Tencent’s executives will continue to seek ways to return money to shareholders. Currently, the company prefers share buybacks over dividends or asset sales due to historically low valuations. Tencent’s strategy director, James Mitchell, believes that the current gross margin level is sustainable and that there is room for further growth.
While Chinese consumer consumption remains weak due to various factors such as a struggling real estate market and rising youth unemployment, Tencent expects its core businesses, including gaming and payments, to be less vulnerable during the crisis as consumers continue to spend on lower-cost items. The company anticipates an acceleration in monetization through summer hits such as Valorant and Lost Ark. Additionally, Tencent plans to expand its most profitable product, Honor of Kings, into more genres.
Q: What contributed to Tencent’s profits exceeding expectations?
A: The growth of video advertising on WeChat and increased engagement of users with video accounts on the platform played a significant role in Tencent’s profits exceeding expectations.
Q: Is the Chinese economy losing momentum?
A: Despite concerns, Tencent’s results indicate that spending on lower-cost and leisure activities remains resilient, suggesting that the Chinese economy is not losing momentum.
Q: How has Tencent’s online advertising division performed?
A: Tencent’s online advertising division experienced a 20% increase in revenue, making it the fastest-growing division within the company.
Q: What is Tencent’s strategy to return money to shareholders?
A: Tencent prefers share buybacks over dividends or asset sales, as valuations are historically low.
Q: What are Tencent’s plans for the future?
A: Tencent aims to expand its core businesses, including gaming and payments, and invest in the potential of generative AI in the long term.