Tencent "submits the answer sheet", with both revenue and profit increasing

$Tencent(TCEHY.US)

Source | Dongge's E-commerce Insights

Author | Jin Shan

Tencent's revenue increased by 8% YoY, with profit up 51% YoY

On August 14, Tencent released its Q2 2024 earnings report before the U.S. market opened and after the Hong Kong market closed. The financial report shows that Tencent's total revenue reached 161.1 billion yuan, up 8% YoY. Under non-IFRS accounting standards, profit for the period was 58.4 billion yuan, a 51% increase YoY.

At the close of trading that day, Tencent's Hong Kong shares ended at HK$373.8, down 1.3% YoY; its U.S. pre-market shares closed at $48.98, up 0.89% YoY.

Performance Overview

Tencent's Q2 2024 total revenue was 161.1 billion yuan, up 8% YoY.

Value-added services revenue grew 6% YoY to 78.8 billion yuan, accounting for 49% of total revenue, slightly lower than 50% in the same period last year. Due to the strong performance of PUBG MOBILE and increased popularity of Supercell's games, international game revenue rose to 13.9 billion yuan, up 9% YoY in both reported and fixed exchange rate terms. Domestic game revenue returned to growth, increasing 9% YoY to 34.6 billion yuan.

Online advertising revenue grew 19% YoY to 29.9 billion yuan, driven mainly by revenue growth from Video Accounts and long-form video. It accounted for 19% of total revenue, up from 17% in the same period last year.

Fintech and business services revenue increased 4% YoY to 50.4 billion yuan, accounting for 31% of total revenue, compared to 32% last year.

Other business revenue was 19.84 billion yuan, up 46% YoY.

Gross profit was 85.9 billion yuan, up 21% YoY. Revenue costs were 75.2 billion yuan, down 4% YoY; gross margin was 53%, compared to 47% last year. Sales and marketing expenses were 9.2 billion yuan, up 10.2% YoY; general and administrative expenses were 27.5 billion yuan, up 8% YoY.

Under non-IFRS, operating profit was 58.4 billion yuan, up 27% YoY; operating margin rose from 31% last year to 36%. Profit for the period was 58.4 billion yuan, up 51% YoY. Profit attributable to equity holders was 57.3 billion yuan, up 53% YoY.

Total cash was 415.2 billion yuan. Free cash flow was 40.4 billion yuan, up 35% YoY. Net cash was 71.8 billion yuan.

Despite its large revenue base, Tencent maintained growth and saw significant profit increases, demonstrating strong overall performance.

As of June 30, 2024, the combined monthly active users of WeChat and WeChat reached 1.371 billion, up 3% YoY, exceeding expectations of 1.36 billion. QQ's mobile MAUs were 570 million, flat with expectations and last year. Paid subscriptions for value-added services grew 12% YoY to 260 million, also in line with expectations.

Mini-program total user time grew over 20% YoY, thanks to its robust transaction and content ecosystem. Transactions facilitated through mini-programs achieved double-digit percentage growth YoY. Mini-game gross billings grew over 30% YoY.

High Growth in Games and Advertising

Games and advertising have become the main drivers among Tencent's three core businesses, while fintech services have slowed due to macroeconomic conditions.

In the gaming sector, some institutions had already predicted a rebound in Tencent's gaming business, with several classic titles performing well.

Domestically, flagship games Honor of Kings and Peace Elite both returned to revenue growth in Q2 2024. The mobile game Naruto Online reached a new milestone of 10 million average daily active users in May 2024. The recently released Dungeon & Fighter: Origins has attracted millions of IP fans with strong player retention, potentially becoming the next long-term hit.

Thanks to frequent content updates and social features, Brawl Stars set a new record for quarterly average DAUs, ranking third among international mobile games by DAU. The game's revenue grew over tenfold YoY.

In advertising, Video Accounts—"the hope of the village"—contributed significant incremental growth, which is uncommon amid the overall slowdown in domestic ad growth.

First, Video Accounts' user base has expanded. The earnings report only mentioned that total user time on Video Accounts grew significantly YoY. Clearly, Tencent doesn’t want to draw too much attention to Video Accounts' rapid growth.

According to Guohai Securities, Video Accounts had 900 million MAUs and 450 million DAUs in 2023, surpassing Kuaishou in both metrics, though average user time still lags behind Douyin and Kuaishou.

Meanwhile, Video Accounts has enhanced its recommendation algorithm and added more localized content, boosting user engagement.

Compared to Douyin and Kuaishou's current scale, Video Accounts remains a "value 洼地" (value 洼地), attracting brands and small-to-medium merchants to invest, thereby increasing Tencent's future ad revenue.

Some small merchants are switching to Video Accounts because the ecosystem is less competitive and more profitable. Brands are entering because Video Accounts covers a broader audience and can integrate with private domains like corporate WeChat to boost repeat purchases.

In contrast, the fintech segment may enter a low-growth cycle amid weak consumption.

Tencent executives stated, "We see clear signs that consumers are becoming more budget-conscious in payments. In credit, we observe that consumers want to borrow more now, but our income has actually decreased because we proactively tightened lending. We reduced lending due to the macro environment and weak consumption. On the other hand, wealth management actually grew as many consumers chose to save more during uncertain times rather than spend."

As of June 30, 2024, Tencent had 105,506 employees, nearly unchanged from 105,417 at the end of last year.

Currently, Tencent's market cap on the Hong Kong stock market stands at HK$3.48 trillion. Tencent stands out as the highest-valued listed internet company in China.

Maintaining such growth at Tencent's scale is no small feat, and its profits have surged. Going forward, games and advertising will drive further growth.

References:

1. Tencent Q2 2024 Earnings Report

2. Wall Street News, Tencent Q2 Earnings Call: Rapid Growth in China's AI Demand, Negotiations with Apple Over iOS Mini-Game Revenue, Plans to Release Valorant Mobile