On November 15th, Tencent Holdings Ltd. (0700.HK) released its third-quarter financial report, showing a revenue of 154.63 billion yuan, a year-on-year increase of 10%, and a net profit (Non-IFRS) of 44.92 billion yuan, a year-on-year increase of 39%.
Pony Ma, the CEO of Tencent Holdings Ltd., stated in the financial report that “the company achieved solid and high-quality revenue growth in the third quarter this year, significant improvement in profit margin, and structural operating leverage. Emerging businesses such as Channels and Mini Games contributed to income sources with high-profit margins while shifting focus from businesses with limited development room to those with higher growth potential.”
During the conference call, Tencent executives specifically mentioned their AI model “Hunyuan”, and related AI applications.
According to the financial report, the introduction of the large model has largely improved Tencent‘s business efficiency. Currently, over 180 internal businesses have integrated with Tencent‘s Hunyuan model. The large model has driven a 20% year-on-year growth in Tencent‘s advertising revenue in Q3, outpacing industry benchmarks.
Regarding US sanctions on chips, Tencent responded that Tencent placed chip orders relatively early and currently maintains a high inventory level, including adequate inventory of H800 chips. The existing inventory level can support several generations of updates for Tencent‘s Hunyuan model. “Tencent‘s cloud capabilities will not be affected by US chip bans. In the future, we also need to improve chip utilization efficiency as high-performance chips will focus on training artificial intelligence”, state one executive on the conference call.
WeChat Channel: Huge growth potential
According to the financial report, while WeChat Channel is still in the early stage of releasing dividends for Tencent, it has already brought considerable increase in revenue. The advertising revenue of WeChat Channel exceeded 3 billion yuan in the last quarter alone.
In the third quarter, the advertising revenue of WeChat Channel showed significant growth compared to the previous quarter, benefiting from increased playback volume and user watching time, while maintaining a stable ad loading rate percentage. In addition, the live streaming service fees have also become a source of income for Tencent‘s enterprise services, significantly improving the profit margin of this business. Data shows that total video playback volume in the third quarter grew by over 50% year-on-year.
“At present, the ad loading rate for Video Account is less than 3%, while that of similar products in domestic market generally exceed 10%.” During a conference call, Tencent executives stated that there is vast monetization potential for WeChat Channel in the future. AI will also be used to further improve click-through rates and may use more discrete data points to target specific audiences and enhance conversion rates.
Confident in gaming business
In the third quarter of this year, Tencent‘s revenue from its gaming service increased by 4% YoY to 75.7 billion yuan. International market gaming revenue grew by 14% to 13.3 billion yuan, with a growth rate of 7% excluding the impact of exchange rate fluctuations. Domestic market gaming revenue increased by 5% to 32.7 billion yuan. This marks Tencent‘s consecutive three quarters of double-digit growth in the international market and sets a new high for overseas quarterly revenue this year.
“Tencent has been patient in terms of time and resource investment in games, and all game businesses are able to maintain a relatively healthy profit growth rate, even if we don’t release major games within a three-month period”, said Tencent executives in the conference call, highlighting their confidence in the gaming business.
“Most optimization has been completed”
According to the financial report, Tencent‘s employee welfare expenses in the first three quarters of this year decreased compared to the same period last year. As of September 30th this year, Tencent had a total of 105,309 employees, representing a decrease of 3,527 people compared to the same period last year.
Regarding income costs, Tencent stated that the income costs remained relatively stable in the third quarter of this year at 78.1 billion yuan. The growth in revenue and stable income costs resulted in a decrease in the proportion of income costs to total revenue from 56% during the same period last year to 51%. As for whether they will continue to reduce costs and increase efficiency in the future, Tencent executives said that most efficiency optimizations have already been completed with regards to employee numbers. In the future, the company will strive to maintain a streamlined team size.
Also worth noting is Tencent‘s executives’ evaluation of the current stock value. “From the current market situation, the valuation of Chinese tech companies’ stocks is almost at a historical low.” The executive stated that Tencent has always been focused on shareholder returns and will try different tools, including repurchases and dividend distributions, to increase shareholder returns. “Repurchasing may be a more effective means than other methods to help the company better reward shareholders.”