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Tencent 2Q - beat expectations

The Tencent 2Q numbers didn't disappoint when they were released after market close in Hong Kong yesterday. This was in the middle of our trading day, the Naspers share price immediately shot 4% higher. Tencent is up 3.5% today. The numbers beat on top and bottom line, with revenues up 59% YoY and EPS up 44% YoY. What is amazing is the QoQ growth, where revenue is 14% higher than 3 months ago and profits are 17% higher. Most companies would be happy with that level of growth over twelve months instead of just three.

The biggest chunk of the business is still gaming, where revenues increase 39% YoY, taking the division's contribution to group revenues from 72% to 65%. From a diversification point of view, having their other divisions play a more significant role in the company is a good thing. Gaming is addictive but barriers to entry are rather low.

Their other two divisions are online advertising which saw revenues up 55%, accounting for 18% of group revenues and then their 'Other' division saw revenues up 177% to account for 17% of group revenues. Their other division includes some exciting projects, namely digital payments, cloud computing and then Artificial Intelligence (AI). Remember under the payments segment, WeChat and Starbucks China have teamed up to allow people to pay for their coffee using the app

WeChat is the platform that ties all their divisions together because when people are on the app, Tencent is able to direct the users to other services in the group. The number of Monthly Active Users (MAU) is up 19.5% YoY to 963 million. Joining the 1 billion club is just around the corner now.

Having a look at the above metrics you can see why Naspers's purchase of Tencent was the deal of the century. Unlike Amazon which has razor thin margins, Tencent has operating margins above 30%. Coupled with revenue growth in the region of 40% to 50%, the amount of fresh cash that they produce each quarter is a huge advantage. They can afford to take punts in next generation businesses, where many will fail but the few that survive will be major players in a Chinese economy growing at 6% off an already massive base. Buy Naspers, buy Tencent.


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