$TENCENT(00700)$ released its Q3 earning report, with the good sign of "costs reducing and efficiency increasing". Although revenue slightly missed, the profit beats market consensus, which improved the valuation.
Total revenue 140.093 billion RMB, down 2% year-on-year, slightly miss the consensus of 141.4 billion
Comparable EPS 3.38 RMB, up 1.6% year-on-year, ending the last 3Q's downward trend and beat market consensus of 3.06RMB.
Key points.
1) Users. Video accounts continue to grow, and WeChat’s steady growth has reached 1.3 billion. The number of QQ users rebound slightly due to summer holiday. In addition, Super QQ Show is also expanding its penetration and influence. Time spent on WeChat has grown rapidly in the third quarter.
2) Games. Only three self-developed games launched in Q3, the lack of new products and the high base impact of the minor protection policy in July and August resulted in a 7% year-on-year decline in local games, slightly lower than market expectations.
However, overseas games performed well. Although "PUBG Mobile" declined a lot, The launch of Tower of Fantasy overseas in August, coupled with the record high turnover of "VALORANT" and the great content update popularity of "Clash of Clans" Therefore, Tencent's overseas games have achieved a positive growth of 2% despite a global decline.
3) Entertainment and Ads. Tencent's video subscribers remained at 120 million, slightly less than the consensus of126 million. It also meas the lack of new content in whole industry.
Ads business showed an unexpected recovery, from a year-on-year decline of 18% in the second quarter to a decline of nearly 5% in this quarter, especially social advertising, which has almost equaled last year's revenue, showing the strong commercialization potential of the WeChat ecosystem.
4) Fintech and Entreprises. Rev of 4% year-on-year growth, lower than market consensus, but still the only segment recorded a positive growth. The competitive advantage of Tencent’s payment is still there, with the release after the pandemic, payment will rebound soon.
5) Expenses. Sales cost 78.1 billion yuan, down 2% year-on-year, makes the gross profit margin little improved to 44.2%, the highest since Q3 last year. GA expenses were 26.5 billion yuan, up 11% year-on-year, but sales expenses decreased by 32% year-on-year.Therefore, the comparable EBIT was 51.6 billion yuan, higher than the market expectation of 35.4 billion.
6) Profits. Q3's profit is the highlight. Net profit attributable to the parent company has turned positive growth, and the speed of recovery has significantly beat market expectations. Among them, the rapid recovery of the advertising business will help improve the overall gross profit rate. In addition, cost reduction and efficiency increase continue to be reflected in financial indicators. In particular, a large reduction in promotion and marketing expenditures is still the key to improving efficiency. In addition, layoffs and downsizing are also continuing.
The core operating income of main business has also improved significantly in the third quarter. The non-IFRS net income attributable to the parent company, which includes the impact of changes in the share of profits and losses of associates/joint ventures, interest income, etc., but mainly excludes the impact of changes in investment income, impairment provisions, and amortization of intangible assets, is also generally concerned by the market Profit indicators have directly returned to the positive growth, achieving a profit of 32.2 billion, a year-on-year increase of 1.6%.
Besides, $Sea Ltd(SE)$ no longer belongs to an associate company in Tencent's equity assets, but is classified as a general financial asset measured at fair value in other comprehensive income, and the profit or loss recognized by reclassification is 41.3 billion, which is regarded as disposal profit and loss in accounting and included in other net income , resulting in significant fluctuations in investment gains and losses this quarter.
7. Repurchases and Dividends.
From June 28 to October 14, Tencent has repurchased more than 60 million shares, using a total of more than 18 billion Hong Kong dollars. After the financial report sensitive period, Tencent may continue to repurchase actions. From June 28 to September 2, the major shareholder reduced its holdings of 76 million shares of Tencent shares. At present, the major shareholder's NAV and share price discount rate have narrowed.
Tencent also agrees to distribute $Meituan(03690)$ shares as dividend to shareholders at a ratio of 10:1, which is exactly the same as the previous dividend in $JD-SW(09618)$ .The advantage for Tencent includes tax-saving , and it can also leave dividend tax for shareholders.
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