Tencent’s Profits Surge to $35 Billion Despite ‘Challenging Year’

Net profits at Tencent climbed by 41% to $35 billion at Tencent, China’s social media, games and streaming giant, in the year to December. Revenues were up by 16% to RMB560 billion ($87.8 billion).

Despite the profits surge, the company’s management described 2021 as a “challenging year.”

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They were not being disingenuous. China’s tech sector has operated for nearly two years under a cloud of increased regulation, political uncertainty and, recently, whipsawing share prices.

Barely a week ago, Tencent’s Hong Kong listed shares were crushed down to ten-year lows as regulatory uncertainty for Chinese companies caused leading finance firm JPMorgan to describe the sector as “uninvestable.” Two days later, the company’s shares rebounded by an astonishing 25% as the Chinese government outlined a more accommodating economic policy. (Some commentators even inferred a bottom to the current cycle of tech regulation.)

Regulators are known to have crimped Tencent’s huge Chinese games business by a halt on new games approvals and through technical measures intended to reduce games addiction in minors. They have ordered changes to Tencent’s growing financial services business and imposed new laws on data privacy and other restrictions in advertising and on the use of data within the same group. There have been fines and executive orders targeting Tencent Music and online reading business China Literature.

Behind the scenes, China’s regulators are believed to have put pressure on the company to unwind market dominating positions and to make financial contributions to the government’s ‘common prosperity’ initiative. The firm has complied by disposing of its stake in China-based e-commerce giant JD.com and overseas has raised money by cutting its stake in Southeast Asian e-commerce and games firm SEA.

“2021 was a challenging year, in which we embraced changes and implemented certain measures that reinforced the company’s long-term sustainability, but had the effect of slowing our revenue growth,” said management in a regulatory filing on Wednesday.

“Despite financial headwinds, we continued to make strategic headway, including driving widespread adoption of our enterprise software and productivity tools, increasing content creation and consumption in our video accounts, and expanding our international games business. We believe the China internet industry is structurally shifting to a healthier mode characterized by a re-focus on user value, technology innovation, and social responsibility.”

The regulatory impact showed up most strongly in Tencent’s domestic Chinese games business. In the fourth quarter, total time spent by minors was reduced by 88% year-on-year and contributed just 0.9% of the total time spent on games. Revenue from minors was down by 73%. The company says it is seeking other ways of monetization in the sector including developing new games, animated series and a movie based on ‘Honour of Kings’ characters.

The contrast with international, where the company has continued to acquire games developers, was sharp. The company claimed to have developed and operated five out of the top ten titles measured by daily active users. “League of Legends World Championship” claimed to be the world’s most popular eSports tournament, attracting a record-high of approximately 74 million peak concurrent viewers.

Domestic games revenues grew by 6% to RMB129 billion, driven by games including “Honour of Kings,” “Call of Duty Mobile” and “Moonlight Blade Mobile,” partly offset by a decrease in revenues from “DnF” and “Peacekeeper Elite.”

International Games revenues grew by 31% to RMB45.5 billion, driven by “PUBG Mobile,” “Valorant,” “Brawl Stars” and “Clash of Clans.”

Other parts of Tencent’s value added services were also strong. Overall, subscriptions to content services grew by 8% year-on-year to 236 million. Music subscriptions grew by 36% to 76 million. Tencent Video increased its subscription count by 1% year-on-year to 124 million and cemented its number one position in China. In line with its competitors, Tencent Video is now implementing a cost optimization process to reduce financial losses.

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