Tencent profit surges as growth hits fastest pace since 2018

By Bloomberg Aug 12, 2020

Tencent’s 2Q earnings beat was driven by heady performances across all business lines, including online games, social advertising and fintech, delivering a dose of reassurance to investors as a US ban looms for WeChat.

– Vey-Sern Ling and Tiffany Tam, analysts

Tencent is focusing on its core home market amid growing foreign hostility. It won approval from Beijing to earn money from Call of Duty Mobile, the smartphone version of a long-running franchise that will underpin its gaming business, and has charted a line-up of new titles for 2020 to shore up resilient franchises Peacekeeper Elite and Honor of Kings. New titles like Brawl Stars drove a 40 percent surge in online gaming revenue during the quarter — its biggest increase since 2017. It’s also driving discussions to merge US-listed Huya and DouYu International Holdings to create a Twitch-like $10 billion local leader in games streaming. Tencent has already folded Huya’s results into its own, swelling both its top and bottom line.

One risk to its outlook was the surprise delay of Mobile Dungeon&Fighter, though analysts expect eventual approval for a Nexon title that’s supposed to be Tencent’s tent-pole for the second half.

”Although the direct revenue impact is small, Mobile DnF’s delay and the WeChat ban in the US cast a shadow over the near term outlook,” Bernstein analyst David Dai said.

China’s No. 2 company had gone on a tear, gaining more than $280 billion of market capitalization since a March trough, before US President Donald Trump signed an executive order labeling WeChat a national security risk. It’s unclear how the White House will define that ban, but the sweeping language of the order — which would bar “transactions” with the Chinese company from September — leaves the door open for the administration to extend it well beyond WeChat.

The messaging service grew monthly active users 6.5 percent to more than 1.2 billion as of June’s end. Started in 2011 as a WhatsApp clone, the service has become deeply ingrained in Chinese life, indispensable to the hordes who use it to chat, shop, watch videos, play games, flirt, order food and taxis. It pioneered the all-in-one or super-app concept by embedding lite apps or mini programs — a model emulated by Alibaba Group Holding as well as Facebook. Its success sprang in part from the fact that China banned global services such as WhatsApp, Twitter and Instagram, allowing WeChat and a host of other Chinese equivalents to flourish in an alternate internet realm.

At a minimum, Trump’s order likely gets WeChat removed from Apple and Google’s mobile stores, which in turn means suspending updates or even blacking out a service vital to communications on the factory floor, in households and the boardroom. And if American consumer giants like Starbucks and Walmart are prevented from doing business with WeChat in China, Tencent may also take a blow to advertising and e-commerce sales.

“Uncertainties still exist for Tencent and other Chinese internet companies with business in the US, and Chinese pure-plays will be perceived as safer by investors,” Dai wrote before earnings were released.

BLOOMBERG