Tencent’s profits have exceeded market expectations, signaling that Chinese consumers are turning to social media and games despite the national recession. 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. Net profit fell less than expected, reflecting increased content spending and a significant one-time gain in the previous year’s quarter. This news comes as a relief for investors who have been concerned about the strength of the Chinese market.
The growth of online advertising, particularly video advertising on WeChat, has been the key driver for Tencent’s success. The increasing engagement of users with WeChat’s video accounts has led to a 50% increase in total views during the quarter. This is great news for Tencent, especially considering the ongoing legal battle with ByteDance, the owner of TikTok, over online media.
Tencent’s gross margins have also reached levels not seen since 2018, approaching 50%. Adjusted net profit, excluding exceptional items, increased 34%. Despite already distributing approximately $24 billion to shareholders this year, Tencent continues to seek ways to return money to investors. The company currently prefers share buybacks over dividends or asset sales due to historically low valuations.
Despite the overall positive performance of Tencent, the Chinese consumer market remains weak due to various factors such as a declining real estate market and rising youth unemployment. The deflationary pressure has worsened in October, raising expectations for further economic stimulus. Additionally, Tencent’s expansion rate remains below its pre-Covid peak. However, the company’s international game revenues increased 16% in the quarter, contributing to its overall growth.
In conclusion, Tencent’s solid performance in video advertising and other divisions has surpassed market expectations, demonstrating the resilience of Chinese consumer spending. The company continues to explore new opportunities to expand its business and provide value to shareholders. With the ongoing competition in the social media and gaming sectors, Tencent aims to maintain its leading position leveraging the popularity of WeChat and exploring new areas such as generative AI.