Tencent Holdings, operator of China’s biggest social media app and the world’s largest gaming business by revenue, reported a profit decline for the third quarter of 2023 that was still better than market estimates, as the country’s economic recovery continued to face pressure.
The Hong Kong-listed internet giant posted a profit of 36.2 billion yuan (US$5 billion) for the three months ended September 30, down 9 per cent from 39.9 billion yuan a year ago. That exceeded the consensus estimates of 32.4 billion yuan by analysts polled by Bloomberg.
Total revenue in the quarter reached 154.6 billion yuan, up 10 per cent from 140.1 billion yuan a year ago. That was slightly worse than the consensus estimates of 154.8 billion yuan, according to analysts polled by Bloomberg.
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“During the third quarter of 2023, we achieved solid and high-quality revenue growth, notable margin expansion, and structural operating leverage,” said Pony Ma Huateng, founder and chief executive of Tencent Holdings.
“Relatively new services such as Video Accounts and Mini Games contributed high-margin revenue streams while we refocused away from less-scalable activities. We are increasing investment in our AI models, providing new features to our products and enhancing our targeting capabilities for both content and advertising.”
Tencent’s shares in Hong Kong rose 4.8 per cent on Wednesday ahead of the earnings announcement, closing at HK$322.6.
The results came as Tencent continued to fight against macroeconomic uncertainties in the country’s efforts to recover from the pandemic, and explored new growth drivers for its business.
As part of its new expansion, the company has invested in generative artificial intelligence (AI), competing in the race for China’s own ChatGPT-like services. In September, Tencent launched its self-developed Hunyuan large language model (LLM), the type of technology that underpins OpenAI’s ChatGPT and similar products, following similar moves by domestic rival Baidu and Alibaba Group Holding. Alibaba owns the South China Morning Post.
While Hunyuan Assistant is not available for public use, Tencent has opened it to enterprise clients, and integrated the technology into more than 180 services including the conferencing app Tencent Meeting and web-based word processor Tencent Docs, along with its online advertising business and WeChat search.
On Wednesday, Tencent president Martin Lau Chi-ping said the company has one of the largest inventories of AI chips among all players in China, as it was the first to put in orders for Nvidia’s H800 graphics processing units.
“We have enough chips to continue our development of Hunyuan for at least a couple more generations,” Lau said during a post-earnings conference call with analysts, adding that Tencent is also seeking domestic alternatives to imported chips.
The number of monthly active users for WeChat, Tencent’s ubiquitous social media app, reached 1.34 billion in the third quarter. The app’s video function Video Accounts saw total views grow by 50 per cent compared with the same period last year.
Tencent’s advertising business posted the fastest growth among its business segments, with a 20 per cent increase to 25.7 billion yuan in the quarter, thanks to robust demand for ads on Video Accounts, mobile networks and within the WeChat search engine, according to the company.
Local services and consumer goods clients were the main drivers behind the strong growth in advertising, Tencent said.
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WeChat’s Video Accounts, also marketed as Channels, has been a key driving force behind its advertising sales growth since late last year, according to a recent note by Barclays.
Tencent’s domestic games revenue saw a 5 per cent increase to 32.7 billion yuan, marking a recovery from flat growth in the previous quarter when the company said it lacked popular commercial releases.
During the most recent quarter, Tencent launched several long-awaited new games in the mainland market, including major PC titles Valorant and Lost Ark, betting on them to boost domestic sales. Meanwhile, its evergreen titles such as Honour of Kings also recorded increased revenue.
International games revenue rose by 14 per cent year on year to 13.3 billion yuan, down from 19 per cent growth in the previous quarter, driven by a recovery in flagship shooting game PUBG Mobile, as well as healthy revenue contributions from several global titles such as Goddess of Victory: Nikke.
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Tencent president Lau said the company maintains a “strong and defensible franchise” in the established category of competitive multiplayer games, with a “substantial pipeline” of at least nine titles in development in various genres, including the mobile version of first-person shooting game Valorant.
Lau also said mini games are playing an increasing role in Tencent’s video gaming empire.
“Mini games, which is a successful vertical use case for mini-programs, has become the largest casual game community in China,” he said.
The company’s fintech and business services segment, which includes cloud computing for enterprise clients, grew 16 per cent in the third quarter to 52 billion yuan. Tencent noted that its fintech revenue posted double-digit growth compared to the same period last year thanks to increases in commercial payments activities and wealth management revenues.