[Asia Economy Reporter Eunmo Koo] Tencent posted earnings that exceeded market expectations in the first quarter of this year, benefiting from the ‘stay-at-home’ economy driven by the government’s strict control policies during the COVID-19 pandemic. As a leading platform company in China, it is also considered attractive due to its high potential for market dominance amid the expansion of the online ecosystem.

According to Samsung Securities on the 17th, Tencent’s revenue in the first quarter of this year reached 108 billion yuan, a 26% increase compared to the same period last year, and net profit attributable to controlling shareholders grew by 6% to 28.9 billion yuan, surpassing market expectations (revenue of 101 billion yuan, net profit of 23.6 billion yuan).

The growth in paid subscription customers and qualitative improvement in traffic led the earnings growth. WeChat’s monthly active users (MAU) reached 1.2 billion, an 8.2% increase year-on-year, while QQ’s MAU decreased by 1% to 690 million. The number of paid subscribers for Internet Value-Added Services (VAS) also showed strong performance, increasing by 19.3% to 197 million. During the same period, government and corporate promotions were concentrated on social networking service (SNS) media, benefiting from the qualitative growth of traffic.

Growth in game and advertising revenue was also highlighted. VAS revenue recorded 4.24 billion yuan, a 27.5% increase year-on-year. Among this, SNS revenue rose by 22.8% to 2.51 billion yuan, and game revenue grew by 30.8% to 3.73 billion yuan.

Samsung Securities analyst Sunmyung Hwang explained in the report that “In the first quarter, increased online usage led to a surge in paid subscriptions and mobile game usage (Honor of Kings and Peacekeeper Elite), benefiting Tencent.” He added, “Although 33% of game revenue came from the Lunar New Year and COVID-19 periods, and management mentioned the possibility of growth slowing in the second quarter, continuous growth is expected due to new game launches and increased overseas sales.”

Online advertising revenue grew by 32.4% to 1.77 billion yuan, dispelling concerns about sluggish growth, but fintech and business revenue growth slowed to 2.65 billion yuan, a 21.5% increase, due to a decline in offline transaction volume.

There is also a forecast that Tencent will benefit from structural changes in the industry in the mid to long term. Analyst Hwang said, “Due to restrictions imposed by countries to control COVID-19, online penetration rates in industries such as remote work, healthcare, and education have deepened.” He added, “An increase in the establishment of online systems to respond to potential crises in various industries is expected, and Tencent is likely to secure market leadership with the launch of ‘WeChat Work & Tencent Meeting (remote work)’, ‘Tencent Health (telemedicine)’, and ‘Tencent Education (online education)’.”

Attention should be paid to the low valuation (stock price level relative to earnings). Analyst Hwang stated, “Earnings this year are expected to gradually rise from the first quarter low.” He explained, “Although the recent stock price rebound has raised the 12-month forward price-to-earnings ratio (PER) to 29 times, it is still lower than the 5-year average of 30 times. Given the solid earnings growth expected with the secured demand for digitalization among Chinese companies, we maintain a positive investment opinion as the number one platform company in China.”

This content was produced with the assistance of AI translation services.