Tencent reported a total revenue of $18.42 billion, a growth of 29% YoY, buoyed by a good performance by its mobile gaming segment. The Chinese conglomerate’s quarterly results for Q3 2020 were announced in the shadow of tightening regulations and growing scrutiny of monopolistic activity. Earlier this month, the Chinese government halted Ant Group’s IPO valued at $37 billion. The Shanghai Stock Exchange said that this was because there had been “material changes” in the regulatory stance on financial services, and Ant Group’s IPO might no longer meet all requirements for listing.

Martin Lau, president of Tencent, assured investors that the imminent regulations will not be much of a problem for the company. “There will not be a lot of changes in our strategy.” He was answering an investor’s question regarding how the policy will affect Tencent’s fintech operations.

Lau said that Tencent’s business and strategy “fits very will with the spirit of the [antitrust] regulatory framework”. “And we also embrace competition. And as a matter of fact, we thrive on competition. And sometimes, even internally, we compete — have multiple products competing with each other.”

The company seemed eager to talk about the competition its products face, and that its actions aren’t necessarily monopolistic. On the gaming business, an investor asked why the number of Tencent games in China’s top-10 mobile games had come down. James Mitchell, chief strategy officer, replied that this was a “very healthy development”. “Our aspiration is not domination,” he added.

Gaming business saw global growth

Revenue from Tencent’s online gaming increased year-on-year, driven primary by paying users in China as well as other international markets. The company’s mobile games had a good year with revenues increasing by 45% year-on-year (YoY). Total smartphone games revenue grew 61% YoY. The company’s most famous offering Honour of Kings exceeded a whopping 100 million daily average users (DAU) in 2020. While the company refused to disclose its revenues from individual markets, it said that the “global game business is truly global”. Aside from the US, Japan and China, its properties such as League of Legends, Supercell, Mini Games, PUBG Mobile, Call of Duty Mobile had performed well in various parts of the world.

  • Other less-known games were also quite successful. For instance, the internally-developed Naruto Mobile became one of the top fighting games in China, the company said. Moonlight Blade Mobile, League of Legends World Wild Rift also saw good success, the company said.

PC gaming stable: On the other hand, PC gaming revenue was stable at $1.82 billion. Increased revenue from League of Legends globally and Valorant in western markets offset decreased revenue from Dungeon & Fighter in China, said Lau. “With respect to key PC games, we continue to view the sector fairly favorably. While the PC game market has not experienced the same revenue growth as the mobile game market, PC games are highly influential. There is plenty of room for IP and product innovation within the PC platform to drive direct revenue contributions or broader platform benefits,” said Lau.

Debate over distribution channels’ cuts: Concerns about having to pay a large cut of app-based revenues to Android and other distribution channels persist among Tencent investors (a similar discussion is ongoing in India as well). Responding to a question about whether Tencent sees any room for improvement in lowering fees being paid to game distribution channels such as Android, James Mitchell recalled the company’s position that the “the game industry economics were not ideal for the game studios”. He said that in many cases, the distribution channels were capturing a bigger share of the profits than studios themselves.

  • On Tencent’s part, Mitchell said, the company is in the process of negotiating revenue sharing agreements so that it is “more sustainable”. That being said, Mitchell added that Tencent has a “good relationship” with big traditional channels, and it is in a “healthy and sustainable position”.

Subscriptions to value-added-services

Subscriptions to Tencent’s fee-based value-added services (VAS) increased by 25% year-on-year to 213 million. Overall VAS represented 56% of Tencent’s total value, said Martin Lau. Within this, social networks accounted for 23% and online games, 33%. Video subscriptions grew by 20 YoY to 120 million, while music subscriptions grew even faster by 46% YoY to 52 million. The company’s original drama and animated series attracted a great deal of subscribers for Tencent Video, the company claimed.

Online advertising returns to pre-COVID levels; fintech grows ‘healthily’

Online advertising in China appears to have largely returned to pre-COVID levels. Some industries such as tourism, however, are still struggling. The segment grew 15% quarter-on-quarter, indicating improving business conditions within China. In total, the segment accounts for 17% of Tencent’s total revenue

Meanwhile, FinTech and Business Services, which account for 26% of Tencent’s total revenue, ‘grew healthily at a similar rate to prior quarters’ due to continued expansion of its commercial payment and wealth management businesses

  • Total payment volume (TPV) increased 30% YoY. “Online transaction growth benefited from an accelerated shift from off-line to online purchases due to the pandemic as well as greater usage of Mini Programs for transactions in categories such as groceries and apparel,” said James Mitchell. The “Mini Programs” he was referring to are sub-applications within the WeChat/Weixin ecosystem.

Earnings snapshot:

  • Total revenue: $18 billion (up 19% YoY; up 9% QoQ)
  • Gross profit: $8.43 billion, (up 33% YoY; up 6% QoQ)
  • Operating profit: $6.67 billion (up 70% YoY; up 12% QoQ)

Press release and financial results | Investor call transcript