Tencent beats after gaming grew at fastest pace in two years

Tencent’s revenue grew a faster than expected 29% after it expanded the world’s largest online gaming empire in defiance of an economic downturn.

Sales rose to 114.9 billion yuan ($16.5 billion) in the three months ended June, beating estimates after online gaming revenue expanded at its fastest pace in more than two years. It reported a net income of 33.1 billion yuan that beat the highest of analysts’ projections, thanks to a gain of more than 8.6 billion yuan from asset disposals and gains in valuation among its global portfolio of investments. Shares in Prosus NV, which holds the internet assets of major shareholder Naspers, gained about 3%.

China’s biggest social media company has benefited from an internet resurgence during Covid-19 but is grappling with economic malaise as well as a US WeChat ban with potentially far-ranging impact. While Tencent didn’t address that sanction in its earnings outlook, executives will seek to reassure analysts on a call later it can withstand a White House campaign that’s already ensnared Huawei Technologies Co. and dozens of Chinese up-and-comers.

Tencent is focusing on its core home market amid growing foreign hostility. It won approval from Beijing to earn money from Call of Duty Mobile, the smartphone version of a long-running franchise that will underpin its gaming business, and has charted a line-up of new titles for 2020 to shore up resilient franchises Peacekeeper Elite and Honor of Kings. It’s driving discussions to merge US-listed Huya Inc. and DouYu International Holdings Ltd. to create a Twitch-like $10 billion local leader in games streaming. New titles like Valorant drove a 40% surge in online gaming revenue during the quarter.

One risk to its outlook was the surprise delay of Mobile Dungeon&Fighter, though analysts expect eventual approval for a Nexon Co. title that’s supposed to be Tencent’s tent-pole for the second half.

“2020 will be a big year for Tencent games,” China Merchants Securities analyst Leo Liu said. But there’s “concern about the delay of Dungeon and Fighter because it’s Tencent’s gaming blockbuster and masterpiece, which may affect performance ahead.”

China’s No. 2 company had gone on a tear, gaining more than $280 billion of market capitalisation since a March trough, before US President Donald Trump signed an executive order to label WeChat a national security risk. It’s unclear how the White House will define that ban, but the sweeping language of the order — which would bar “transactions” with the Chinese company from September — leaves the door open for the administration to extend it well beyond WeChat. The messaging service grew monthly active users 6.5% to more than 1.2 billion as of June’s end.

What Bloomberg Intelligence Says

The pandemic may also spur quicker adoption of Tencent’s payments, cloud computing and
video-conferencing services.

– Vey-Sern Ling and Tiffany Tam, analysts

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