After a brutal one-two punch from Covid-19 and Chinese regulators in 2022, Tencent is showing clear signs of recovery.
The Chinese gaming and social-media giant on Wednesday reported an 11% year-over-year increase in revenue for the quarter ended in March, ahead of analysts’ estimates on S&P Global Market Intelligence. That represents the first double-digit revenue growth for the company since 2021. Tencent’s revenue for the whole of 2022 increased only 1% from the previous year: The company was battered by China’s strict Covid suppression policies and the crackdown on the internet technology sector. Operating profit also increased 9% last quarter compared with a year earlier, in line with analysts’ expectations.
Advertising is a particular bright spot: Such sales grew 17% from a year earlier. One major driver is a new advertising revenue stream from Tencent’s short-video and live-streaming services on its
messaging platform. China’s nascent consumption recovery has also helped. The sharp economic slowdown and regulatory crackdown on sectors like after-school tutoring, which had been big advertisers, hurt Tencent’s advertising revenue last year.
Still, revenue for the company’s domestic game business—its bread and butter— grew only 6% year-over-year. Its chart-topping games “Honor of Kings” and “Peacekeeper Elite” remain big money-spinners. But Tencent will probably need more new games for growth to really recover. China only resumed approval for gaming licenses in April last year, after an eight-month freeze—also related to the broad crackdown on internet platform companies, tutoring firms and other businesses targeted by Beijing for supposed negative impacts on young people, inequality and other social trends.
Games in China require these licenses to be able to make money. But fortunately, the government has started to approve more games again, including some potential blockbusters. Tencent’s “Metal Slug: Awakening”, which was launched last month, has already moved to third place in China’s iOS app store, according to Morgan Stanley. The bank estimates that the game could gross around one billion yuan, the equivalent of $143 million, a quarter.
But given that regulations on the game industry will likely remain stricter than before, a bit more diversified business model for Tencent—both regionally and in terms of actual business segments—is prudent. There are some encouraging signs: Tencent’s international game revenue grew 25% last quarter from a year earlier. But that still only accounts for less than 10% of its total revenue.
Tencent is clawing its way back after the annus horribilis of 2022. But it has more work to do if it wants to lay the foundation for sustained growth. Primarily that means further diversification to insulate itself from Beijing—and some new big hits.
Write to Jacky Wong at [email protected]