Tencent has benefited unexpectedly from China’s economic problems. The $400 billion technology behemoth revealed quarterly sales growth on Wednesday that was a little underwhelming.
China slowdown creates thrills: However, the depressing economic climate in the nation is pushing people to spend their money on inexpensive amusement.
The company’s profitable video gaming and advertising divisions should benefit from this.
The three months up to the end of June had a mixed bag of results. Although revenue increased by a respectable 11% to 149 billion yuan ($20.4 billion), it fell just shy of the median expert projection compiled by Refinitiv.
Sadly, Tencent’s domestic gaming sales, which made up more than a quarter of its top line, remained unchanged from a year ago, in part because the business put out less fresh content.
However, the high-margin internet advertising segment was a bright spot, as revenue increased 34%.
As a result, Tencent’s overall adjusted operating profit margin increased from the second quarter of previous year by 6.2 percentage points to 33.6%.
Executives at Tencent were able to sound cheerful despite this week’s deluge of negative economic news from China, which included declining home prices, dropping new bank loans, weakening monthly industrial output, and a liquidity issue at a significant Chinese asset management.
“Positive Signs for Domestic Game Growth and Advertising Prospects in Tencent’s Portfolio”
On the strength of fresh releases, domestic game growth could pick up again in the coming months, and advertisers should continue to spend money on Tencent’s films, games, social networks, and other apps.
In fact, the company’s chief strategy officer, James Mitchell, believes video games will profit if buyers cut back on expensive luxury items and turn to “affordable entertainment-driven experiences” instead.
According to Citi analysts, this summer’s movie ticket sales could reach 16 billion yuan, or 90% of the summer box office before the pandemic.
Following a 5% increase since the beginning of the year, shares of Tencent are currently trading at 18 times anticipated earnings for the following 12 months, according to Refinitiv, a significant premium over e-commerce-focused internet rivals like Alibaba.
Having inexpensive thrills pays off.