Tencent's "credit book" has become thicker again

Author | Huang Yu

Editor | Zhou Zhiyu

As one of Tencent's core businesses, Tencent Games has not been so thriving for a long time.

In the second quarter, driven by the DNF mobile game, Tencent Games swept away the haze, with domestic market revenue recovering growth and overseas revenue accelerating. Earlier this year, Ma Huateng criticized that games should not rely solely on past achievements.

The resurgence of games has once again become a growth driver for Tencent, and the "big brother of the Internet" has delivered a significant report card.

Tencent released its semi-annual performance report on August 14th, showing that in the second quarter, it achieved a revenue of 161.12 billion RMB, an 8% year-on-year increase, higher than the growth rates of the previous two quarters; Non-IFRS net profit attributable to equity holders increased by 53% year-on-year to 57.31 billion RMB, exceeding market expectations.

While the revival of games has relieved investors, the key to Tencent's overall performance stabilization and significant profit increase lies in its cost reduction and efficiency improvement measures implemented since 2022.

However, the era of rapid Internet growth has passed, and returning to the peak is not easy for Tencent. To maintain its image as a "pillar of stability" in the eyes of investors, Tencent must continue to deepen its moat while accelerating the growth of various "new growth" businesses such as Video Accounts, Mini Programs, and AI large models.

The clarion call for the "return of the king" has been sounded, and Tencent is striving to regain its best state.

New King

During the golden age of Internet industry development, Tencent dominated the scene, not only taking the top spot in domestic social networking but also quickly growing into the world's largest gaming company, holding popular games such as "Honor of Kings" and "Peacekeeper Elite".

The gaming business is Tencent's cash cow, contributing nearly 30% of its revenue, which is crucial. However, in the past two years, Tencent Games has shown signs of weakness, failing to create new blockbuster games and its performance has been mostly flat.

In 2023, Tencent's domestic and international gaming revenue only saw a slight increase for the full year, with both quarters showing declines. By the first quarter of this year, gaming revenue was still not ideal, with an overall year-on-year decrease of 0.4% to 48.1 billion RMB, with overseas gaming growing by 3% and domestic gaming declining by 2%.

Against the backdrop of Tencent's efforts to create new blockbuster games to turn the situation around, the DNF mobile game launched in May this year has lived up to expectations, becoming one of the key catalysts for the growth turnaround of Tencent's gaming business.

Tencent's financial report shows that in the second quarter of this year, the Tencent Games segment generated 48.5 billion RMB in revenue, reaching a quarterly high, with both domestic and overseas revenue growing by 9% year-on-year, exceeding expectations. Domestic market gaming revenue reversed the decline of the previous two quarters, growing by 9% to 34.6 billion RMB; international market gaming revenue reached 13.9 billion RMB, also achieving a 9% accelerated growth.

The DNF mobile game undoubtedly will further enrich Tencent Games' achievements. Since its launch over two months ago, the DNF mobile game has almost consistently ranked first on the best-selling list, becoming one of the most profitable games in the global gaming market According to the Sensor Tower Store Intelligence platform, in the last 11 days of May, the revenue of this game in the domestic iOS market has exceeded the total revenue of "King of Glory" and "Peace Elite", resulting in a 12% growth in Tencent's mobile game revenue in May.

Ivan Su, an analyst from the investment research firm Morningstar, previously stated that he expects the DNF mobile game to contribute 3% of Tencent's total revenue in 2024, reaching 22 billion yuan.

Tencent's management stated at the performance release conference that the DNF mobile game has activated millions of IP fans, performed well in player retention rates in the first 30 days, and is expected to become the next long-lasting popular game.

However, having just one DNF mobile game is far from enough to reverse Tencent's game situation in the second quarter.

Tencent stated that the DNF mobile game and the "League of Legends" PC game are the main drivers of the recovery in domestic game sales, while long-lasting games such as "King of Glory" and "Peace Elite" have resumed revenue growth in the second quarter; and the "PUBG" mobile game has accelerated international game sales growth.

Revitalizing flagship games has been Tencent's focus in recent years, and it is evident that after a series of optimizations, it has finally paid off.

Morgan Stanley predicts that Tencent's international market revenue in the second quarter of this year will increase by 40%-50% year-on-year, coupled with the recovery of several long-lasting games in the domestic market, Tencent's revenue growth rate in the second half of the year is expected to reach 13%.

However, some investors believe that since the overseas game market is not large, there is still room for growth for Tencent's games overseas, but the outlook in the domestic market is not optimistic. Overall, sustained stable growth will still face considerable pressure.

Tencent's management also admitted that although Tencent's game performance in the second quarter was good, it cannot be ignored that in recent years it has been facing a highly challenging business environment, and launching successful new games is becoming increasingly difficult. In order to maintain the sustainability of existing games and drive growth, Tencent's games must continue to innovate and stimulate user interest.

How to "grow new shoots" for long-lasting games and create new hit games is currently the main task for Tencent's games.

Strike

In addition to the revival of the gaming business, another focus of attention in Tencent's second-quarter performance is the continuous high growth in profits.

According to Wall Street News, since the second half of 2022, Tencent has achieved a new trend of profit growth exceeding revenue growth for seven consecutive quarters.

Behind the rising profit levels is the continuous optimization of Tencent's revenue structure. Simply put, it means giving up ineffective revenue growth and focusing on high-profit margin business growth.

The financial report shows that in the second quarter, high-margin revenue sources such as domestic game revenue, video ad revenue, small game platform service fees, and video merchant technical service fees all achieved growth.

Tencent's management revealed that recently, Tencent's profit growth rate has exceeded the revenue growth rate by more than 2 times. This phenomenon is mainly driven by two factors: the increasing contribution of high-profit businesses and a series of proactive cost management measures taken.

Of course, profits cannot always maintain high-speed growth. Tencent's management pointed out that in the future, some efficiency improvement measures are expected to achieve the target, and the trend of profit growth surpassing revenue growth may slow down, from a doubling effect to slightly more than 1 time Despite this, the transition to higher-profit revenue is a long-term trend that will continue for a long time.

In the process of developing high-profit revenue, the importance of WeChat to Tencent is self-evident. It is not only Tencent's platform with the strongest daily active users and ecosystem, but also the hope for Tencent to seek the next strong growth point.

Tencent is accelerating the release of the commercial value of WeChat, and the launch of Video Accounts three years ago is an important step for Tencent to build a closed-loop business ecosystem for WeChat.

Tencent's financial report shows that benefiting from factors such as Video Account advertising and AI efficiency improvement, Tencent's advertising revenue in the second quarter was 29.9 billion yuan, a year-on-year increase of 19%, becoming the biggest driving force for Tencent's revenue growth for multiple quarters.

For Video Accounts, the important task this year is to develop e-commerce, which complements the advertising business. However, the e-commerce of Video Accounts is still in the process of improving infrastructure.

It has been noted that recently, while Video Accounts have been continuously adjusting categories, they have also successively released two heavyweight pieces of information: "Video Account Store Upgraded to WeChat Store" and "WeChat Store 0 Deposit Trial Operation Management Rules".

It is reported that WeChat Store will support the circulation of store and product information in multiple WeChat scenarios such as Official Accounts (Subscription Accounts, Service Accounts), Video Accounts (Live Streaming, Short Videos), Mini Programs, and Search.

Obviously, in order to better promote the development of e-commerce for Video Accounts, WeChat has begun to make concessions.

According to Tencent, in the second quarter of this year, the number of creators who obtained closed-loop revenue from Video Accounts more than doubled year-on-year. Video Accounts promote e-commerce development, enhance transaction capabilities in a systematic way, provide users with a seamless shopping experience, and drive sales for merchants.

Another focus for Tencent in the future is AI, which can not only be a multiplier for Tencent's business development, but also open up new growth space for its B-end business, and ensure its competitiveness in the next super traffic entrance competition.

With AI's large model underlying technology continuously iterating and the commercialization path for the C-end still unclear, Tencent has chosen a more practical path, first serving its own business, then opening up large model capabilities to industries through Tencent Cloud, slowing down on the C-end until May of this year when it launched the independent AIGC APP Yuanbao.

With the arrival of the AI era, the landscape of technology companies will undergo a major reshuffle. At such a critical historical turning point, if Tencent wants to maintain its "iron throne," it must dig deeper into its moat, seize the new opportunities brought by AI, promote the longevity of old trees, and allow "new shoots" to grow strong.

Having passed through the trough, Tencent is now able to face the new round of competition with a better posture