Tencent Game Sales Surge Most in Years in China’s Lockdown
Tencent Holdings Ltd.’s revenue beat expectations after Covid-19 lockdowns propelled gaming sales to their fastest pace of growth since 2017, sending shares surging in Hong Kong.
The WeChat operator’s revenue rose 26% to 108.1 billion yuan ($15.2 billion) after online gaming sales leapt 31% during the coronavirus-stricken March quarter, helping offset shrinking ad budgets and a record Chinese economic contraction. Shares rose as much as 4% Thursday, their biggest gain in more than a month.
The numbers underscore how Tencent’s among the more resilient of China’s internet giants thanks to its bread-and-butter gaming division, which rode an upswell of spending from homebound players in the world’s largest gaming arena. But the company warned those gains could peter out as China returned to normality and went back to work, while global macro uncertainty may continue to depress spending by corporations on online advertising.
Ad spending on “long-form video from multinationals has seen a substantial step-down,” Chief Strategy Officer James Mitchell told analysts on a conference call, adding those clients account for about half the business. “You should expect media advertising revenue to be under pressure in the second quarter of the year.”
Tencent offered the first glimpse of how China’s giant internet industry fared during the pandemic. It gained more than $42 billion in market value since Covid-19 first broke out, defying a global market rout to outperform peers like Baidu Inc. and Alibaba Group Holding Ltd.
A surge in social media and gaming traffic drew new ad revenue to help offset shrinking traditional online marketing budgets. Tencent’s total smartphone games revenue surged 64% during the first quarter, helped by the consolidation of Clash of Clans maker Supercell. Revenue at Tencent’s burgeoning fintech division slid from the previous quarter after merchants shut their doors, but began recovering from April as activities in China resumed.
“It may be challenging for Tencent to sustain 1Q’s strong growth into the next quarter as the pandemic retreats in China and online game players return to work,” Bloomberg Intelligence analyst Vey-Sern Ling said. “Lingering industry and macro headwinds may also dampen ad sales ahead.”
After the results, shares in major shareholder Naspers Ltd. and the entity that holds its internet assets, Prosus NV, rose more than 5% to a record.
But longer term, the world’s largest game publisher is contending with renewed challenges from the likes of ByteDance Ltd. and Alibaba.
While Tencent’s core online entertainment business must convince consumers to keep splurging on aging cash cows like Honor of Kings, rival ByteDance is luring users and advertisers away and into its viral social networks. It’s also preparing to enter hardcore gaming.
It’s in cloud and fintech where Tencent faces possibly its fiercest battle with Alibaba. Parts of those units, which made up more than a quarter of the company’s revenue in 2019, are expected to bounce back over 2020 and resume driving its longer-term expansion. Alibaba-backed Ant Financial’s Alipay is also seeking to attract more merchants and transactions in part by replicating the lite-app model WeChat pioneered.
Alibaba and ByteDance will also fight fiercely for online advertising, which remain vulnerable to economic shocks if Covid-19 persists.
“WeChat’s Moments ads are really designed for big brands, and we see risk that they are cutting budgets under intense pressures on cash flows,” said Richard Kramer, an analyst at Arete.
Written by Zheping Huang