23 March 2019
Tencent plans to channel more resources into the so-called industrial internet to help Chinese enterprises upgrade themselves for a digital future. Photo: Bloomberg
Tencent plans to channel more resources into the so-called industrial internet to help Chinese enterprises upgrade themselves for a digital future. Photo: Bloomberg

How Tencent is trying to protect its future

Tencent has reported better-than-expected financial and operational results for the third quarter, prompting investors in the Chinese social media and gaming giant to heave a huge sigh of relief.

Looking at the numbers, one can assume that the management is making significant progress in shifting the company’s focus from the embattled game business to two new key drivers, the payment business and cloud services.

Payments and cloud, if the momentum is not let up, can well serve as bedrock for Tencent to transform itself from a mass-market focused internet firm to a platform enabling industrial internet to support China’s economy.

Tencent’s profit in the three months to September was up 30 percent to 23.3 billion yuan, beating average analyst projection of 19.3 billion, helped in part by investment gains.

Non-GAPP profit, stripping one-time items, rose 15 percent from a year earlier to 19.7 billion yuan, according to the figures released on Wednesday.

Revenue expanded 24 percent to 80.6 billion yuan, though it marked the slowest quarterly growth in more than three years, as Reuters noted.

In the second quarter, the Shenzhen-headquartered firm recorded its first profit fall in 13 years, shocking investors as it announced in August a 2 percent decline in net income for the period.

The dismal result came after Chinese regulators froze new game approvals as they sought to curb online game addiction among the youth.

With no clarity on when the curbs will be eased, Tencent has been making an effort to reduce its reliance on the game business and focus on other promising internet services.

A major business revamp was announced recently in a move aimed at capturing opportunities in cloud and industrial internet services in areas that include fintech, healthcare and transportation.

In the third quarter, Tencent saw its online advertising and other business revenue growing at a hefty double-digit pace. Though “value-added services”, which include the game business, still accounted for 55 percent of the company’s revenue in July-September, online advertising and other businesses managed to expand their share of the total income.

If the ad and other businesses maintain strong double-digit growth going forward, they could well generate half of Tencent’s revenue in the not too distant future.

“Other” business revenue recorded 69 percent year-on-year growth to 20 billion yuan in the September quarter, with the main contribution coming from payment-related services and cloud.

Cloud services revenues more than doubled from a year earlier and grew at a double-digit percentage rate from the preceding three months. For the first nine months of 2018, cloud revenues topped 6 billion yuan.

WeChat Pay emerged as a market leader in China’s mobile payment space, even as it competes with Alibaba affiliate Alipay. Tencent said it had maintained its leadership in China’s mobile payment market in terms of monthly active users and daily active users.

The daily transaction volume increased over 50 percent year-on-year, within which the offline daily commercial payment transaction volume grew 200 percent.

Tencent said it had strengthened its payment infrastructure to ensure safer and more convenient payment services.

WeChat Pay has been aggressively rolling out its services in China as well as some overseas markets. The company was the first to roll out cross-border payment between Hong Kong and China through financial technologies.

Users of WeChat Pay do not need to switch their mobile wallet version for payment when they are not in their home market. That should help WeChat Pay gain market share from Alipay, especially when it comes to frequent cross-border travellers.

Another bright spot for Tencent has been its wealth management, micro-loans and insurance businesses. LiCaiTong, Tencent’s wealth management platform, added pension funds to its fund offering, and its aggregated customer assets surpassed 500 billion yuan as of end-September.

WeBank’s WeiLiDai short-term loans service saw its loan balances grow rapidly while the non-performing loan rate remained at below-industry level, benefiting from advanced risk prediction models and user targeting, the company noted.

Tencent, no doubt, has been doing a lot of things to shift its revenue dominance from games to other businesses. Mobile payment, advertising and cloud business are clearly the three key pillars for the Chinese internet behemoth’s future development.

Realizing that it needs to look for new ways to protect its growth, Tencent announced this month that it will channel resources into “industrial internet” and help enterprises transform their businesses digitally.

Tencent may take some time before it can adopt a wholesale shift in mindset and change its business mix in a big way, but it is making the right noises and is also starting to take some action. 

The “other” businesses, if pushed in the right way, can help Tencent into a new growth phase, while also serving China’s macro-economic development goals. The political risks will be minimal, unlike the case with the gaming operation.

Investors will certainly welcome such a situation.

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EJ Insight writer

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