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Tencent Achieves $24 Billion Annual Profit as Regulators Hover

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Courtesy of Tencent

Tencent, the social media, games and entertainment colossus that is China’s largest corporation, announced annual profits of $24 billion or $2 billion per month for 2020, a stunning 67% leap. But investors’ eyes are largely focused on what China’s regulators have in store for the company.

Two years ago, regulators sought to control the games industry component of Tencent. Now the specific area of vulnerability appears to be financial services, where rival tech giant Alibaba has already come under pressure.

Alibaba was recently forced to rewrite the business model for its Ant Group financial services unit after Ant’s blockbuster IPO was halted at the last minute, supposedly after presidential intervention. It has been suggested that Tencent will have to turn its budding financial services business into a holding company.

Tencent’s regulatory filing, posted on Wednesday after the close of the Hong Kong stock market, gave little insight on regulatory matters. “We will work closely with regulators and collaborate with industry partners to deliver compliant and inclusive FinTech products, while prioritizing risk management over scale,” it said. Detail may be left until a conference call with financial analysts later in the evening.

In the filing, management called 2020 an “unprecedentedly challenging year.” But it revealed a large leap for value added services which predominantly span video and music. The number of paying subscribers jumped some 22% to 220 million, giving a 35% increase in VAS gross profits to RMB143 billion. The detail showed that Tencent now counts 123 million video subscribers, a 20% lead over nearest Chinese rival iQIYI, which lost ground in 2020.

Online advertising revenue, more largely coming from games and social media, grew by a slower 20% to RMB82.3 billion, in a year knocked sideways by COVID-19. Ad-related gross profits were up by 25% at RMB42.6 billion.

Management was able to claim that user numbers for its Weixin/WeChat social media product had grown by 5% and had now reached 1.225 billion. It was also able to show that Weixin/WeChat’s status as a super app had grown further.

“We increased stickiness among young users by enriching communal experiences such as playing AI-powered social games and watching Tencent Video together in video calls. QQ’s video and image feed services, Mini World, increased its user engagement as we added hashtag feature and initiated trending topics that resonate with Generation Z. We launched joint promotions and celebrity eSports events for our popular games such as ‘Honour of Kings’ and ‘Call of Duty Mobile’,” Tencent said in its filing.

But fear that regulators may further attack the company on monopoly grounds, limit the inter-connections between social, games, video and payments, is the kind of thing that has wiped $170 billion off Tencent’s market capitalization since mid-January when its shares hit their all-time high.

Ahead of the results announcement, Tencent shares closed down 0.8% down at HK$623.5. Group market capitalization at that price is HK$5.98 trillion or $770 billion.