Tencent's business strength emerges in its second quarter financial results

On August 12, Tencent released its second quarter financial results. According to the data disclosed in the financial report, Tencent's revenue in the second quarter of 2020 was 114.883 billion yuan, up 29% year-on-year, and net profit was 30.153 billion yuan, up 28% year-on-year, both exceeding market expectations.

It should be noted that in the first quarter, Tencent's game business has made good gains in the "stay-at-home economy". However, with the social resumption of work and production gradually picking up speed, the "stay-at-home economy" no longer occupies a dominant position in people's life. In this context, Tencent released its second financial report. Therefore, when all the people's lives back to normal, what is the driving force that supports Tencent's sustained growth in the second quarter?

From the financial report, the answer is not hard to find:

• In the second quarter of 2020, Tencent's value-added services business generated revenue of 65.002 billion yuan, up 35% year-on-year.

• Revenue from the financial technology and corporate services business was 29,862 million yuan, up 30% year-on-year.

• Revenue from the online advertising business reached 18,552 million, a year-on-year increase of 13%.

Data has shown that Tencent's revenue sources and structure are becoming more diversified and balanced. In addition to the rapid growth of its traditional value-added services (VAS) business, financial technology and enterprise services have also become powerful engines to drive Tencent's growth.

Tencent's continued investment in the Internet and its agile response to the epidemic have helped it forge stronger risk-resilience capabilities, which are becoming the new engines to drive its growth.

 

Financial and corporate services are the new growth engines

While Tencent shares had a downward spiral for a while after hitting a high in 2018, on the whole, Tencent has always been a superior capital markets player. Its latest earnings report for the second quarter also lived up to market expectations. According to the information disclosed in the earnings report, Tencent's performance on key indicators such as revenue and net profit in the second quarter remained excellent.

• Tencent's second quarter revenue was 114.883 billion yuan, up 29% year-on-year, higher than the market's expectations of 112.439 billion yuan.

• Net profit was 30.153 billion yuan, up 28% year-on-year, higher than market expectations.

The financial performance shows that Tencent's profitability has been further optimized. According to the financial report, Tencent's adjusted EBITDA for the quarter was 43.742 billion yuan, and the net profit margin attributable to shareholders was on the rise for three consecutive quarters, reaching 26.2% for the quarter.

Steadily rising profitability allows Tencent to build on its capital reserves. Tencent's total cash holdings as of June 30 were 281.86 billion yuan (US$39.704 billion), according to its second-quarter results, which provides enough financial support for Tencent to invest in new businesses in the post-epidemic era.

According to the second quarter results, in addition to value-added services business maintained rapid growth, financial technology and enterprise services business also embarked on rapid growth.

The rapid growth of the financial and corporate services business is inseparable from Tencent's strong investment in it. As we all know, Tencent started to invest heavily in the industrial internet sector after the 930 reform in 2018, unlike the TO C business, the industrial internet requires a long-term cultivation. Meanwhile, Tencent's To B business bore great pressure in the first quarter due to the impact of the epidemic. As a result, the growth achieved in the financial and corporate services business is even more valuable.

The second-quarter earnings report noted that "cloud and enterprise services revenue recorded growth year-over-year and quarter-over-quarter, driven by higher cloud service usage by Internet companies and customers in the public service sector".

In the post-epidemic era, Tencent has taken full advantage of its B+C product matrix, with the results showing that in the second quarter, Tencent Cloud signed major contracts with customers in the financial institutions and public service sectors, while expanding its presence in emerging verticals such as healthcare, education, conferences and exhibitions to help customers achieve digital transformation. In terms of technology and infrastructure, Tencent adopts customized equipment, establishes and expands its own mega data centers, which will help improve the performanceoptimise the cost of cloud services in the long term.

Tencent's industrial internet business resilience and competitive advantages have been reflected in the second quarter results. This is due to changes in the industry environment, as well as Tencent's own investments.

 

To B market is getting bigger

As one of the earliest Chinese Internet giants, Tencent has always been in the process of exploring the industrial Internet and developing new technologies. It is the continued exploration and investment that has helped Tencent's financial and corporate services business units to achieve sustained growth under the pressure of the epidemic.

Specifically, after the epidemic strike, the digitalization process of offline merchants to speed up significantly, Tencent, which has made great efforts in recent years to promote the "industrial Internet", has played an important role in this process.

During the epidemic, Tencent made simultaneous efforts in the multi-dimensional aspects of smart retailing, remote office/teaching, etc. to bring the advantages of B+C products into full play, for example, many brands used Tencent's smart retailing tools for customer management; as a technical service provider, Tencent supported the online Canton Fair 26,000 enterprises from around the world to participate in the online exhibition. Born less than a year ago, Tencent Conferencing has also become the most widely used video conferencing product in China, and provides in-depth services to the government, finance, education, medical and other industries, as well as small and medium-sized enterprises online offices.

In the second quarter, as the impact of the epidemic continued to expand and accelerate the overall digitization of enterprises, Tencent continued to broaden its business boundaries in addition to the retail and remote office sectors, and in the financial sector, Tencent Cloud partnered with China UnionPay and Shenzen Tongda Corporation. In the field of government affairs, based on the experience accumulated through health codes during the epidemic, Tencent launched a new generation of WeCity technology platform, and three products - One Network Management, Government Collaboration and Future Community - to help the digital development of cities.

On July 14, Foxconn Industrial Internet Co. and Tencent Cloud signed a strategic cooperation agreement, based on the superior capabilities and resources of both parties in the field of new infrastructure, it promotes the industrial application such as cloud computing, AI, big data and other technologies to provide digital transformation services for industrial enterprises. 

In addition to cooperating with manufacturing leaders to explore the industrial Internet, Tencent has also created an industrial Internet-enabled platform suitable for industrial digitization, providing digital pedestals for enterprises and helping business users achieve cost reduction and efficiency. At present, eight local city industrial clouds have been landed, achieving batch replication of local city industrial clouds.

While Tencent Cloud continues to settle in the exhibition, financial, government and industrial sectors, it has also continued to increase its market share in areas such as e-commerce, gaming and the Internet. According to data disclosed by Tencent Cloud, during this year's "618 activity", Tencent Cloud's computing resources doubled compared to last year. And the market share of public cloud services for e-commerce category ranked first. In the Internet industry, Tencent Cloud serves more than 70% of Chinese game companies, and its penetration rate in the video industry is as high as 90%, even 80% of the top 100 live broadcast platforms use Tencent Cloud's services.

Thanks to strong product capabilities, user reach and team execution, Tencent Cloud still achieved scale growth in the first half of the year, when it was under pressure from the epidemic and offline project delivery had not yet fully recovered. According to the latest enterprise public cloud service market share report released by international research firm Gartner, in the IaaS market, Tencent Cloud's global market share in 2019 rose one place from 2018 to rank fifth in the world. In the world's Top 5 cloud computing vendors, Tencent Cloud maintains the first growth rate. These achievements have become an important reason for the capital market to vote with money and "pay" for Tencent. In this regard, a number of firms have expressed their optimism about Tencent's financial and enterprise services.

Tencent's accumulated experience in the To B business has not only contributed to its own revenue growth, but  has also helped stimulate domestic demand in China, which assisted the recovery of small and medium-sized enterprises (SMEs) and promoted an "internal cycle" in the process of gradually returning social activities to the right track. Complementary to the economic growth model, Tencent has been able to provide a deeper foundation for its development.

Overall, after an organizational restructuring in 2018, the overall development of Tencent's industrial internet is remarkable. And after gradually forming a unique To B methodology, Tencent began to export continuously externally and continued to increase investment.

In May this year, after the National Development and Reform Commission explicitly included the computing infrastructure represented by data centers and intelligent computing centers into the scope of new infrastructure, Tencent announced that it would take the lead in taking out 500 billion yuan to invest in new infrastructure to develop the industrial Internet, and promote the digital economy "internal cycle" with investment and production to build Tencent's To B ecology. At the same time, Tencent will also take the development of new infrastructure as an opportunity to link up the upstream and downstream industries to build a digital ecological community to help transform and upgrade traditional industries.

It can be seen that Tencent attempts to leverage both its capital and digital capabilities to help "new infrastructure" and promote its own To B development at the same time.

The second quarter results already show that Tencent's strength in To B is starting to emerge. The reason why it has been able to achieve stable growth in the face of the epidemic, Tencent's diversified revenue structure is the key to resisting risks.

This is an article from WeChat official accounts Deep Insights (ID: deep_insights), written by Hong Yuhan, translated by Chris Yuan.