Strong Results and New Releases
Tencent Holdings Ltd. (OTC:TCEHY) reported an impressive 82% increase in net income, surpassing expectations and raising hopes for a rebound in China’s gaming sector. The company’s core gaming division saw a significant resurgence, driven by the success of the summer blockbuster Dungeon & Fighter Mobile, after two consecutive quarters of decline. This positive performance has instilled optimism about the future of China’s $40 billion-plus gaming market, which has faced regulatory pressures.
The release of Dungeon & Fighter Mobile, developed in collaboration with Nexon Co. (Korea: 3659), has been a key factor in Tencent’s recent success. The company is also preparing to launch Black Myth: Wukong, aiming to revitalize its aging game portfolio. Shares of Naspers Ltd., a major investor, rose by as much as 2.7% in response to this positive news.
Industry Challenges and Future Prospects
Despite the strong earnings, Tencent’s executives expressed caution about the cyclical nature of the gaming industry and the increasing competition. Chief Strategy Officer James Mitchell described Dungeon & Fighter Mobile as a potential “evergreen hit,” hoping it will become one of Tencent’s major successes like Honor of Kings. However, President Martin Lau acknowledged the challenging business environment and the high expectations for new game releases.
Tencent faces stiff competition from rivals such as NetEase Inc. and Mihoyo, the studio behind Genshin Impact. NetEase’s Naraka: Bladepoint achieved 4.14 million downloads on iOS in China within its first two weeks, nearly matching Tencent’s top hit, according to Sensor Tower.
China’s broader economic landscape, marked by property crises and high youth unemployment, has impacted consumer and corporate spending. Tencent’s fintech and cloud services, its largest business segment, grew by just 4%, reflecting economic pressures. This slowdown was evident in reduced transactions through WeChat, the company’s popular app.
Alibaba Group Holding Ltd. (NYSE:BABA) and JD.com Inc. (NASDAQ:JD) are scheduled to report their earnings on Thursday, and their performance is also expected to be influenced by consumer sentiment.
Despite these challenges, Tencent’s gross margins improved due to its super-app WeChat, which integrates various services like mini-games, advertising, and video shopping. Online advertising revenue surged by 19%, supporting overall margins. Tencent’s net income reached 47.6 billion yuan, exceeding the estimated 39.9 billion yuan, and revenue increased by 8% to 161.1 billion yuan ($22.5 billion), close to the projected 161.4 billion yuan.
Vey-Sern Ling, Senior Equity Advisor at UBP, noted that the recovery in domestic games is promising, with potential for double-digit growth in the third quarter. Tencent’s strong second-quarter margins suggest positive EPS upgrades and continued momentum into the third quarter. The company’s adjusted operating margin of 36.3% exceeded expectations, driven by growth in video games, advertising, and short videos.
Looking ahead, Tencent is expected to maintain its focus on AI investments and integration, though it faces competition from companies like ByteDance Ltd. (China:300015) and Alibaba in AI development. Tencent has been actively investing in China’s emerging AI startups, which have collectively attracted significant venture funding.
The company has also continued its stock repurchase program, spending nearly $8 billion this year, exceeding other Hong Kong-listed firms. Tencent’s shares have risen approximately 27% this year, contrasting with a 10% decline in the Hang Seng Tech Index.