Tencent's Eggy Battle Royale
China's largest listed company and owner of the ubiquitous Weixin / WeChat super-app, internet conglomerate Tencent reported second-quarter net profits up by 41% year-on-year to Rmb26bn (IFRS basis), the fastest growth since late 2021, on revenue 11% higher to reach Rmb149bn. But the numbers fell short of HK/Shanghai's Finest, which had been expecting Rmb33.4bn and Rmb152bn respectively. Tencent's cost-cutting efforts and focus on "high-quality revenue streams with better margins" like advertising (up 34%) drove the rise in net profit, but...
..... ▷ But revenues fell short due to sluggish domestic gaming sales with a weak domestic pipeline compared to the success of smaller, more freewheeling rival NetEase’s sleeper hit "Eggy Party," its first smash hit in casual titles. NetEase was always associated with “hardcore games” like Fantasy Westward Journey and Tianxia but is now aiming (with cute, squishy eggs) at a broader audience, traditionally dominated by Tencent. International gaming was much stronger, clocking in 19% growth thanks to its shooter game Valorant, though without the slide in the Rmb that would only have been 12%. Social networking was up just 2%, with subscription services offset by lower live streaming.
..... ▷ While a broad-based internet conglomerate, gaming and social networking are by far the two most important businesses for Tencent and fall under the vaguely-named Value Added Services (VAS) segment in its reporting. In the2022annual report, VAS contributed 52% of group revenues and 61% of gross profits, but there's no split given between them. The VAS segment includes a variety of businesses, such as online music, video streaming and e-books. The company has a user base of over 1 billion active gamers, and its social media platforms, Weixin/WeChat and QQ, have 1.9bn monthly active users. Tencent makes money from social networking through advertising and in-app purchases. Mini Games under Weixin's Mini Programs is the leading casual games platform in China and is a high-margin business.
..... ▷ In the gaming space, Tencent is a global leader and is investing in new technologies, such as cloud gaming and virtual reality, which are expected to drive growth in the gaming industry in the future. It is both a publisher of titles developed elsewhere as well as a developer of its own titles. But it's also been spending billions in global gaming company acquisitions for over a decade, taking both majority and minority stakes in search of the next smash hit. Its gaming acquisitions have allowed it to expand its portfolio of popular games and to gain a foothold in new markets as well as gain access to new technologies and talent, but the industry (often compared to movies) is notoriously hit-and-miss.
..... ▷ But like basically all other Chinese companies listed outside the borders of the Mainland, Tencent is, however, aVariable Interest Entity (VIE)🎓 which means that "ownership" of the company that you think you own through the shares you own has its own particular quirks.
Gaming Geek Corner:
Tencent has majority stakes in Riot Games (2011): League of Legends, Valorant, Legends of Runeterra, Teamfight Tactics; Supercell (2016): Clash of Clans, Clash Royale, Brawl Stars; Grinding Gear Games (2018): Path of Exile; and Techland (2023): Dying Light. It has minority stakes in Epic Games (40%): Fortnite, Unreal Tournament; Ubisoft (5%): Just Dance, Rainbow Six Siege, Assassin's Creed; and Activision Blizzard (5%): Call of Duty, World of Warcraft, Overwatch. Its own games include Honor of Kings: A mobile MOBA game (one of the most popular gamesof all timeby revenue); PUBG Mobile: A mobile battle royale game; and Peacekeeper Elite: The Chinese version of PUBG Mobile.
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Market Roundup
US large-cap S&P 500 closed 0.76% DOWN
Tech-heavy Nasdaq Composite closed 1.15% DOWN
Pan European STOXX Europe 600 closed 0.08% DOWN
HK/China's Hang Seng Index closed 1.36% DOWN
Japan's broad TOPIX closed 1.29% DOWN
Focus: Tencent's Eggy Battle Royale
In the Markets: Burry & Buffett Bears?; Yields up, Dollar up, EM down?
MoneyFitt Explains: VIEs: You only think you own them
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MoneyFitt Ka-ming OP : The name “Tencent” is nothing to do with dollars and cents, but is based on its Chinese name Tengxun (腾讯), which incorporates part of founder Pony Ma’s Chinese name (马化腾) and literally means "galloping fast information". Just a little Value Added Service (VAS) of my own for you!
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