Tencent Q2 - It's all about payments & international gaming

Tencent reported weaker than expected numbers yesterday, so both Naspers and Prosus had a bad day. Revenue was up 11% from a year ago, but down 0.5% compared to the previous quarter. Tencent's recent cost-cutting measures are starting to bear fruit with operating profits up 4% quarter-on-quarter and 11% year-on-year.

Gaming is Tencent's most important business segment, but regulatory restrictions in China have made it difficult for that operation to grow. They have redirected some of their attention to international gaming where regulators are less restrictive, resulting in an increase of 19% in revenue over the last year.

The success of Tencent's advertising business was the highlight of the results, with revenue up 34% year-on-year. The growth in advertising is important because it adds diversity to their profit mix.

As a Naspers shareholder, their 26% stake in Tencent is still a great asset. Goldman Sachs see the potential for a 30% increase in the company's share price. Naspers still trades at a deep discount to the value of its underlying investments. We expect both Tencent and Naspers to increase in value this year, assuming no major surprises out of China.