China’s tech giants are supposed to be feeling the lash of the regulators’ tongue as they come under growing anti-trust scrutiny in the areas of pricing, payment methods, and use of data to target shoppers.
But third quarter financial data from social media and entertainment titan Tencent instead showed that the company continues to be a profit generating machine.
For the three months from July to September 2020, revenues climbed by 29% to $18.4 billion (RMB125 billion). Profit for the period climbed 85% year-on-year to $5.71 billion (RMB38.9 billion) with a corresponding leap in net margins from 22% to 31%. Stripping out one-time and non-cash items (to give a non IFRS reading) profits still increased by 33% to $4.89 billion (RMB33.3 billion).
Chairman and CEO, Pony Ma said that the quarterly results reflect the success of a strategic reorganization two years ago. But the numbers also emphasize hos China’s economy has bounced back after the worst of the coronavirus outbreak, and how that has swung Chinese consumption ever more to the advantage of digital players.
The revenue and subscription breakdowns underline the trend. “Revenues from value added services increased by 38% to RMB69,802 million for the third quarter of 2020 on a year-on-year basis. Online games revenues grew by 45% to RMB41,422 million. The increase was primarily due to revenue growth of our smart phone games, including domestic titles such as ‘Peacekeeper Elite’ and ‘Honour of Kings,’ as well as overseas titles,” the company said in a regulatory filing.
“Total smart phone games revenues (including smart phone games revenues attributable to our social networks business) were RMB39,173 million and PC client games revenues were RMB11,631 million for the third quarter of 2020. Social networks revenues increased by 29% to RMB28,380 million. The increase reflected contributions from digital content services including HUYA’s live streaming service, our video subscription service, and our music subscription service, as well as from in-game virtual item sales,” it continued.
Combined subscription numbers across video, literature and music climbed by 25% year on year to 213 million. The all-powerful WeChat (aka Weixin) super app so contested by the U.S. government continued to add adherents. Although nearly ubiquitous in China, WeChat monthly average user numbers were up 5% to 1.21 billion.
Speaking on a conference call with analysts after the results disclosure, senior Tencent executive Martin Lau said that the company’s initial reading of the draft anti-trust regulations do not look especially threatening.
“The consultation paper regarding the platform economy just came out. Our initial thoughts are these. One, our reading of the document it emphasized the principals of fair competition, and regulatory oversight, as well as the promotion of innovation and industry development, ensuring a balance of interests for all stake holders.
“Secondly, our observation is that such regulation is not new, and it is not unique to China. As technology companies become bigger and more important to economies more regulation to reflect the new reality are needed. Not just in China, but globally.
“Third, we believe the government is still supportive of the internet and technology industries, especially the innovation that is driven by this industry. But the intention is to prevent misconduct and to ensure long-term healthy growth.
“Fourthly, Tencent’s development and philosophy fits very well with the spirit of the regulatory framework. Our platforms are open in nature, we focus on creating great products and user value rather than very calculated business operations, and we embrace competition. Sometimes even internally multiple products compete with each other.
“It looks like the regulations are more related to transaction platforms. So for games, which are individual products rather than platforms, they are less of the focus. And in terms of the digital entertainment industry, when I look at the video platform it is still a money-losing business right now. So that probably does not fit into the focus of the regulator at this moment.”
Answering a different question, Lau said there are “not a lot of changes” anticipated in the company’s fintech business. Seeking to distance Tencent from other providers — Alibaba’s Ant Group last week had its IPO abruptly halted by financial regulators — Lau said that compliance rules had been “methodically” followed, and that its operations include a fully-licensed bank.
Prior to the results announcement, Tencent shares in Hong Kong were up by 4.7% to HK$577. Market capitalization at that price is $710 billion (HK$5.53 trillion).