Games help Tencent smash second-quarter earnings expectations as potential WeChat ban looms

Tencent on Wednesday reported results for the three months through to the end of June that beat analyst expectations in one of the fastest revenue-growing quarters in two years.

Still, the earnings report may be overshadowed by an executive order signed by President Donald Trump last week that prohibits any transaction related to WeChat, the wildly popular messaging app owned by Tencent. The executive order comes into effect in September. 

Here’s how the company performed versus Refinitiv consensus estimates from analysts:

• Revenue: 114.88 billion yuan ($16.53 billion) vs 112.72 billion yuan expected. That’s a 29% year-on-year rise, the fastest growth since the second quarter of 2018.
• Profit attributable to equity holders of the company: 33.1 billion yuan vs 27.56 billion yuan expected. That’s a 37% year-on-year rise.

Online game revenue, one of Tencent’s most important businesses, grew 40% year on year to 38.29 billion yuan. That was faster growth than seen in the first quarter of 2020. Analysts at China Merchants Securities expect Tencent to pull in 41.6 billion yuan in online game revenue. 

Tencent’s gaming division got a boost in the first quarter as people turned to its mobile titles while stuck at home during coronavirus lockdowns in China and elsewhere. Tencent warned then that it expected in-game consumption to normalize going forward. 

The online gaming division got a boost thanks to mobile games such as “Peacekeeper Elite” and “Honour of Kings” helping to offset a decrease in PC game sales. Smartphone game revenues came in at 35.99 billion yuan, a 62% year-on-year rise. PC games revenue fell over 6% year-on-year. 

“In China, user time spent on our smart phone games increased year-on-year but decreased quarter-on-quarter due to seasonality and back-to-office behavior,” Tencent said in its earnings release. 

“Internationally, our MAU (monthly active users) increased significantly year-on-year and quarter-on-quarter due to new game launches and more user time spent during the stay-at-home period.”

Last week, Trump issued an executive order banning U.S. transactions related to WeChat. The scope of that ruling is unclear as of now.

Investors will be hoping that Tencent’s management addresses some of these concerns. 

However, analysts don’t think Washington’s move will have a major impact on Tencent.

“WeChat itself has immaterial business and financial exposure to the US,” analysts at China Renaissance said in a recent note. 

“We estimate Tencent’s current revenue exposure to the US is less than 3%, with earnings exposure less than 5%,” the analysts said. 

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