"Tencent's Q3 Revenue Rises 10% to $2.5B, Net Profit Falls 9%"

The founder of Tencent is Ma Huateng, a computer science engineer who, during the early stages of his venture, impersonated a female to chat with others online in the hope of attracting more users to OICQ (the predecessor of QQ). After years of hard work, he has finally turned Tencent into one of the two largest internet companies in China.

Whenever Tencent releases its financial reports, it captures the market's attention, as everyone is curious to see how much money this internet giant has made. On November 15th, after the Hong Kong stock market closed, Tencent released its financial report for the third quarter of 2023. Overall, it is similar to the situation of China's economy, which continues to recover and improve.

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Revenue increases, net profit decreases

Let's take a look at the two most important financial figures, revenue and net profit.

From July to September 2023, Tencent achieved a total revenue of 154.625 billion yuan, an increase of 10.37% year-on-year. There are 92 days in the third quarter, and a revenue of 154.625 billion yuan means that Tencent's daily income is as high as 1.681 billion yuan, a figure higher than the annual revenue of many companies.

In terms of net profit, the third quarter achieved a net profit attributable to the parent company of 36.182 billion yuan, a decrease of 9.42% compared to 39.943 billion yuan in the same period last year, and an increase of 38.25% compared to 26.171 billion yuan in the second quarter of this year.

In July of this year, Tencent was fined 2.99 billion yuan for violations by its subsidiary Tenpay. If the impact of this factor is excluded, Tencent's net profit in the third quarter would still increase but still be lower than the same period last year.

Is Tencent's revenue increase in the third quarter not profitable? It's not that simple.

Looking only at the net profit indicator, Tencent's performance in the third quarter this year is not very good, with a decline compared to last year. However, Tencent's stock price in Hong Kong on November 15th has increased a lot. Logically, a decline in profits is a bearish factor, so why doesn't Tencent's stock price fall but rise? Because from an operational perspective, Tencent's profit level in the third quarter not only did not decrease but also increased significantly.

To understand this, we need to take a deeper look at Tencent's financial report.The profit and loss statement features a section called "Other Income" that is particularly eye-catching. This year's third quarter figure stands at 2.644 billion yuan, compared to 20.886 billion yuan in the same period last year, which is almost eight times this year's amount and more than half of the net profit.

This item contributed significantly to Tencent's excellent performance in the third quarter of last year. It consists of many sub-items, and I won't go into too much detail, but one of them is the investment income from the sale of companies, which is unrelated to the main business. It's like having a monthly income of 10,000 yuan and selling a house for 1 million yuan in a particular month, resulting in an actual entry of 1.01 million yuan for that month. However, you can't claim a monthly income of a million yuan just because of that, right?

Selling a house is a very occasional event that may occur once every few years or even decades and has no relation to your work income. Tencent's "Other Income" is a similar case, so when assessing performance, it is necessary to exclude content unrelated to daily operations. Tencent's financial report lists the relevant data.

Under the non-IFRS system, Tencent's net profit attributable to the parent company for the third quarter is 44.921 billion yuan, a significant increase of 39.27% year-on-year. The operational condition in the third quarter has improved considerably compared to the same period last year, which is the reason for the stock price increase.

On another note, we can draw similar conclusions by comparing revenue and costs.

From July to September, the operating revenue increased by 10% year-on-year, laying the foundation for the increase in profits. At the same time, the operating cost for the third quarter was 78.102 billion yuan, which is 8 million yuan less than last year. Generally, revenue and costs rise and fall together, but Tencent achieved double-digit revenue growth in the third quarter this year, with a slight decrease in costs, resulting in a significant increase in gross profit.

Tencent mentioned in the financial report that the reason for the increase in gross profit is the shift of focus from businesses with less development space to those with higher growth potential and profit margins, such as mini-games and Video Accounts.

International gaming business and financial technology services are the two main growth drivers.

After discussing Tencent's overall performance, let's look at which businesses enabled Tencent to achieve double-digit revenue growth in the third quarter of this year.

Tencent's main business is divided into three parts: value-added services, online advertising, and financial technology and corporate services. Value-added services are further divided into gaming revenue and social networking revenue.In the third quarter of this year, Tencent's gaming revenue reached 46 billion yuan, accounting for 60% of the value-added services income and 30% of the total operating revenue, making it a significant contributor to the company's earnings. In fact, in previous years, Tencent relied more heavily on its gaming business, but in recent years, the introduction of anti-addiction systems targeting young people in China, coupled with setbacks in obtaining new game licenses, led to a sharp decline in domestic gaming market revenue.

Fortunately, Tencent has opened a second front and is thriving in the international gaming market. In the third quarter, the company achieved an operating revenue of 13.3 billion yuan, marking a 13% year-on-year increase and the highest value since the first three quarters of this year. In the future, Tencent is expected to make overseas gaming revenue a new growth curve, with revenue potentially reaching the same level as the domestic market.

In addition to international gaming business, another highlight for Tencent in the third quarter was the revenue generated from financial technology and corporate services, totaling 52.048 billion yuan, with a significant year-on-year increase of 16%, making it the fastest-growing business segment. The revenue from financial technology services, in particular, has driven the overall increase in the department's income. This growth can be attributed to the increase in commercial payment activities and the rise in wealth management service revenue.

In the third quarter of this year, China's GDP rose by 4.9% year-on-year, with the steady economic recovery leading to more frequent domestic commercial activities, from which Tencent's related businesses have benefited. It is evident that any company, even as strong as Tencent, must follow the macroeconomic environment; as the Chinese economy improves, corporate revenues grow.

Tencent is different from other companies in that it is already very large, making explosive growth very difficult unless it can find the key to unlock the door to advancement. Perhaps the mixed model is the key to opening the door to AI, and Tencent has currently invested a significant amount of resources in developing large models. The current large models mainly assist in improving the efficiency of multiple businesses, and they may become an independent business in the future, bringing more direct revenue to Tencent.