Continuing the trend of international electronics firms doing well financially during the coronavirus crisis, shares in the Chinese tech giant Tencent hit a two-year high this week, trading at 447 Hong Kong dollars ($57.67) on May 13.
The previous day, the firm announced that its revenue for the quarter up until March was up 26 percent from the same time last year, worth 108 billion Chinese yuan ($15.2 billion), while its profits for shareholders was worth 28.9 billion yuan.
Tech wiz with popular games
Tencent Holdings owns many of China’s biggest names in tech, including the country’s biggest social media application, WeChat, and the instant messaging app QQ. Furthermore the company controls a major stake in China’s e-commerce, music, video streaming and online advertising sectors.
Its gaming division, Tencent Games, produces many of the most popular Chinese video games and smartphone games. Its revenue from smartphone game sales surged 64 percent in the first quarter of this year. It also holds shares in several major international gaming firms, including France’s Ubisoft and the American developers Epic Games and Activision Blizzard.
As China’s largest game maker – and the world’s largest video game firm, according to some estimates – Tencent has ridden the wave of a 31 percent growth in revenue of China’s online gaming sector this quarter, compared to the same time last year, thanks largely to nationwide shutdowns which has forced customers to stay at home.
Tencent – outperforming competition
With its market value jumping by $42 billion since the coronavirus crisis began in China in January, Tencent has outperformed its close rivals, Baidu Inc. and Alibaba Group Holding.
While Tencent’s revenue for the last quarter was higher than expected, considering that the Chinese economy is now set to experience its worst growth record in almost four decades, its success isn’t that much of a surprise.
Not only have other tech firms maintained decent growth so far this year, Tencent was an early investor in smartphone gaming, especially in mini-apps, an app that works inside another app, such as within Tencent’s WeChat.
Profiting from gaming sector
Tencent put up $28 million to pay users who create virus-fighting solutions with mini-apps, a smart move considering the number of daily active mini-app users in China reached 440 million in March, a figure which some analysts thought would only be achieved at the end of 2020.
The value of the mini-apps is particularly evident in the payment sector, as a recent Nikkei Asian Review article explained, “For Alibaba and Tencent, which compete head-to-head in digital payments, mini-apps offer another benefit. Since businesses running on Alibaba’s Alipay cannot accept payments via Tencent’s WeChat, and vice versa, the more mini-app operators the two companies can lure, the greater share they can grab in China’s multibillion-dollar mobile wallet market.”
Tencent was also in a better position to profit during a shutdown because of the preponderance of gaming sales for the firm’s revenue. Almost a third of Tencent’s revenue comes from online gaming sales, and a little less from its fintech services, like WeChat Pay, one of China’s largest digital payment platforms.
An estimate 19 percent of Tencent’s revenue comes from online advertising, often displayed across its WeChat social messaging app, or on video-streaming service Tencent Video. By comparison, Baidu, one of Tencent’s main competitors, which owns China’s largest search engine, receives almost 72 percent of its revenue from online ads.
Trouble ahead for Tencent shares?
While Tencent’s domination of the mobile gaming sector was a boon during China’s lockdown, the firm worries that its revenue could dip once as the Chinese economic returns to some normalcy and more people are allowed to leave their homes.
A statement released this month by Tencent asserted that it expects “in-game consumption activities to largely normalize as people return to work,” meaning that revenue is unlikely to be as high for the rest of 2020 as it was in the first quarter.
Moreover, Tencent in its statement forecast “some headwinds for the online advertising industry.”
Not only are sales of online games expected to drop, analysts assert that Tencent’s advertising sales could more impacted than its rivals. 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,” an analyst told Bloomberg.
It might be the case, then, that those who bought Tencent shares in December and January were onto a winner, but new investors can expect a more turbulent next few months.