Zhike | Tencent's Performance Exceeds Expectations Significantly. Has Tencent Finally Survived Its Darkest Hour?
Written by Huang Yida
Edited by Zheng Huaizhou
On November 13, Tencent Holdings announced its financial results for the third quarter of 2024.
The financial report shows that Tencent achieved an income of 167.193 billion yuan in 2024Q3, with a year-on-year growth of 8%. While the income in this quarter continues to maintain a steady growth, the profit growth rate outpacing the income growth rate remains one of the core highlights of Tencent's financial report for this quarter. Among them, the gross profit in this quarter was 88.828 billion yuan, with a year-on-year growth of 16%; the Non-IFRS operating profit in the same period was 61.274 billion yuan, with a year-on-year growth of 19%; and the Non-IFRS net profit attributable to the parent company in the same period was 59.813 billion yuan, significantly higher than the Bloomberg consensus expectation, with a year-on-year growth rate of as high as 33%.
Figure: Summary of Tencent Holdings' Financial Report; Source: Company's Financial Report, 36Kr
So, what are the important points in Tencent's financial report for this quarter? Is Tencent still worth continuing to invest in the future?
01 Value-added Services: Strong Growth in Domestic Games
The value-added services business segment achieved an income of 82.7 billion yuan in 2024Q3, with a year-on-year growth of 9%. From the perspective of the income structure, the domestic games achieved an income of 37.3 billion yuan in the same period, with a year-on-year growth of 14%, and the income once again reached a new high in recent years; the international games recorded an income of 14.5 billion yuan in the same period, with a year-on-year growth rate of 11% calculated at a fixed exchange rate; the social network income in the same period (including subdivided businesses such as music, game live streaming, and video live streaming) was 30.9 billion yuan, with a year-on-year growth of 4%.
Domestic games achieved a significant accelerated growth compared to Q2 of this year in this quarter, and at the same time, the income level reached a new high in recent years. The reason why domestic games can maintain a strong growth momentum mainly relies on the income growth of games such as Valorant, Honor of Kings, Peacekeeper Elite, and Dungeon & Fighter: Origins (DNF Mobile Game). In terms of new games, the multi-platform FPS game Delta Force: Xtreme released in this quarter currently has quite encouraging data on the average daily usage time and retention rate of users, showing a certain potential to become an evergreen game.
In this quarter, the macro environment is relatively unfavorable, and the counter-cyclical impact on the game industry with a strong optional consumption attribute is obvious. The A-share game sector shows weak growth, and the income of the constituents of the Game II (Shenwan) Index in the third quarterly report recorded a year-on-year growth of 5.31%, which decreased by 1bp compared to Q2. Benefiting from the continuous release of new games, especially the income increment contributed by the DNF Mobile Game, combined with the steady growth of flagship evergreen games, Tencent's domestic games have significantly outperformed the industry as a whole.
In terms of international games, games such as PUBG MOBILE and Brawl Stars have continued their strong performance previously, which is the main driving force for the accelerated growth of international game income. At the same time, the expansion of VALORANT to the PS and XBOX home console platforms has also contributed a considerable incremental income. It is worth noting that due to the increase in the retention rate of some games, Tencent has actively extended the income deferral period, making the water flow growth rate of international games in this quarter higher than the income growth rate, so the book data underestimates the actual performance of international games.
In terms of profits, the value-added services business segment achieved a gross profit of 47.5 billion yuan in this quarter, with a year-on-year growth of 13%. The growth of the gross profit of the business segment is mainly driven by the growth of the game business (including the domestic and international markets). In terms of profitability, the gross margin of the value-added services business segment in this quarter was 57%, an increase of 1 percentage point year-on-year, and remained the same as Q2 of this year on a sequential basis.
02 Marketing Services: Technological Upgrades Continuously Drive Income Growth
The marketing services business segment achieved an income of 30 billion yuan in this quarter, with a year-on-year growth of 17%. The income growth of the advertising business in this quarter is mainly driven by the advertising income of Video Account, Mini Programs, and WeChat Search. The brand advertising income related to the Paris Olympics also made a small contribution to the growth of the segment income.
A significant change in the original advertising business in this quarter is to rename it as marketing services, aiming to broaden the boundaries of promotion and marketing solutions. For a long time, the continuous upgrading and iteration of the advertising technology platform is the source of the strong growth momentum of the marketing services business. According to the information disclosed in the earnings conference, Tencent used the basic model Hunyuan in this quarter to promote the marking and classification of content and materials; continued to upgrade the machine learning platform to further improve the accuracy of advertising placement; and used the large language model to improve the relevance of commercial search.
In terms of the content ecosystem, the short dramas produced by Tencent provide high-value incentive video advertisements, which is an incremental closed-loop demand for marketing services. At the same time, given that Tencent's current advertising load is significantly lower than that of its peers, Tencent moderately increased the advertising load in this quarter, and still controlled it at a low single-digit in order to balance the user experience and income growth.
In terms of profits, the advertising business segment achieved a gross profit of 15.9 billion yuan in this quarter, with a year-on-year growth of 18%; the growth of the gross profit of the business segment is mainly driven by the income growth of subdivided businesses such as Video Account advertising, long-video advertising, and WeChat Search advertising, but the content cost related to the Paris Olympics has offset part of the income growth. In terms of profitability, the gross margin of the advertising business segment in this quarter was 53%, an increase of 1 percentage point year-on-year, and a decrease of 3 percentage points compared to the previous quarter.
03 Financial Technology and Enterprise Services: Wealth Management and Enterprise Services Continue to Contribute Marginal Increment
The financial technology and enterprise services business segment achieved an income of 53.1 billion yuan in this quarter, with a year-on-year growth of 2%. Compared with the average growth rate of 15% in the business segment last year, the income growth in this quarter has further slowed down.
The continuous slowdown in the income of Tencent's financial technology and enterprise services business is mainly affected by the current macroeconomy. Especially in the financial technology aspect, the weak consumption has led to a decline in the income of the payment service, which is a supporting service, in this quarter. However, there are also operational highlights in the financial technology and enterprise services in this quarter. The income of wealth management services, cloud services, and merchant technical service fees all maintained a positive year-on-year growth, offsetting part of the impact of the decline in payment service income.
In terms of profits, the financial technology and enterprise services achieved a gross profit of 25.4 billion yuan in this quarter, with a year-on-year growth of 19%; the core driving force for the growth of the gross profit of the business segment includes the growth and improvement of the profitability of the cloud business income, as well as the growth of the income of wealth management services and merchant technical service fees. In terms of profitability, the gross margin of the financial technology and enterprise services business segment in this quarter was 48%, an increase of 7 percentage points year-on-year, and remained the same as the previous quarter.
04 Investment Strategy
In this quarter, Tencent continued the pattern of lower-than-expected income and far-exceeding-market-expected profits on the financial side. Essentially, it reflects that Tencent has achieved high-quality growth and continuous improvement in operating efficiency through its endogenous growth ability in the counter-cyclical period.
From the perspective of business segments, the financial technology and enterprise services, which are greatly affected by the counter-cyclical period, have maintained a steady growth overall. Especially in the case of the decline in payment service income, the income growth of the enterprise services business with stronger profitability not only plays a certain supporting role for the performance of the entire segment, but also drives the overall increase in the gross margin of the segment.
The marketing services have benefited from the endogenous growth driven by technology, which has significantly hedged the impact of the counter-cyclical period. The application of high-tech platforms such as the large language model and the machine learning platform not only improves the operating efficiency, but also highlights the technical advantages. Coupled with Tencent's channel advantages, it has ultimately achieved a growth that far exceeds the overall advertising industry. The marginal incremental advertising demand provided by the construction of the user ecosystem and content ecosystem cannot be ignored, which is the manifestation of Tencent's marketing service channel advantages in another dimension.
The game business has continued the strong growth momentum since Q2, and its core driving force is the volume growth of new games and sub-new games. It is worth noting that Q3 includes the summer vacation, which is the traditional peak season for games. However, from the perspective of the overall game industry, Q3 of this year is not a prosperous peak season. Tencent's domestic games have achieved a growth that far exceeds the overall market in Q3, which is essentially a strong performance in its strong product cycle.
At the same time, Tencent's strengthening of the word-of-mouth operation of its game products has also played a very crucial role. For example, the related theme activities of Honor of Kings and Peacekeeper Elite, and the good average daily usage time and retention rate of users after the launch of Delta Force: Xtreme in September are positive feedback on its good reputation.
In terms of expenses, Tencent's period expense expenditure in this quarter has increased to a certain extent, which is related to the expansion of core businesses such as games and advertising. Regarding the rationality of business expansion, the game business is affected by both the economic cycle and the product cycle. Tencent's current product cycle is in a relatively favorable position, so an appropriate expansion in the counter-cyclical period is in line with the needs of business development.
Tencent's advertising business has the technical and channel advantages, enabling it to have a certain ability to expand in the counter-cyclical period. From a more macro perspective, China is currently in a new round of easing cycle, and the market has a high expectation for the economic bottoming out and rebound. Therefore, Tencent's current business expansion is to a certain extent in line with the rhythm of the economic cycle.
In terms of valuation, Tencent, as a typical large-cap consumer technology stock in terms of style, has both value and growth. Behind the high growth of its core businesses of games and advertising, it reflects a certain ability to traverse the cycle. For investors in US stocks, in the early and middle stages of the interest rate cut cycle, with the rise in risk appetite, technology stocks usually receive a higher premium; Hong Kong stock investors are more concerned about the economic recovery rhythm under the guidance of domestic policies, which is the key to whether to increase risk appetite.
From mid-September to early October, in that round of sharp rise in Hong Kong stocks, Tencent also followed the rise, but due to its large market capitalization, its elasticity was slightly lower than that of many small-cap stocks in the same period. However, the subsequent correction has gained a lot of valuation elasticity, strengthening the short-term safety margin. In the medium term, the strong fundamental pattern of Tencent will continue in the future, and the rhythm of economic recovery is an important catalyst, which not only drives the market sentiment to improve, but also the economic recovery will also drive Tencent's performance release and bring strong support to its valuation.
*Disclaimer:
The content of this article only represents the author's views.
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