On August 14, Tencent Holdings (00700.HK) released its second quarter 2024 results. Many data increased significantly, far exceeding market expectations. On August 15th and 16th, Tencent’s stock price rose slightly, with the current price of HK$372.6.

Tencent’s second-quarter financial report is very good, and its performance far exceeds expectations

Financial report data shows that Tencent’s second-quarter revenue was 161.1 billion yuan, an increase of 8% year-on-year, and net profit attributable to the parent company was 47.6 billion yuan, a growth rate of 82% compared with the same period last year. In the first half of this year, Tencent's revenue was 320.6 billion yuan, and its net profit attributable to its parent company was 89.5 billion yuan, second only to the record high of 90.4 billion yuan in the first half of 2021.

It should be noted that part of Tencent's net profit growth in the second quarter came from non-recurring factors. First of all, based on the high tax rate in the same period of 2023, the company's income tax expenses in the second quarter dropped by 28% from the first quarter to 10.2 billion yuan, a year-on-year decrease of 9% and a quarterly decrease of 4 billion yuan. Secondly, the profit attributable from associates and joint ventures in the second quarter was 7.7 billion yuan, an increase of 5.5 times compared with the same period last year, which was only 1.2 billion yuan.

Tencent's Chief Financial Officer Luo Shuohan mentioned in the performance analysis conference call that based on non-IFRS calculations, the profits of associates and joint ventures increased significantly, which was mainly due to the performance improvement of some domestic associates and overseas game studios. Through years of investment, Tencent has established an extensive network of associates and joint ventures around the world, including well-known companies such as Pinduoduo and Kuaishou. Pinduoduo contributed most of the profits.

"Non-recurring" profit growth casts doubt on Tencent

Although Tencent's revenue and profits have achieved significant growth, some analysts have reacted coldly. Some analysts said that the Hong Kong stock price fell by 1.44% the next day after Tencent announced its financial report, and the American Depository Receipts (ADR) fell by 3.35%. %, showing investors’ reservations about Tencent’s growth model.

In this regard, Tencent Chief Financial Officer Luo Shuohan explained the growth of the associate company's profit share during the earnings conference call. He pointed out that on a non-GAAP basis (Non-IFRS), the share of profits from associates increased from $3.9 billion a year ago to $3.9 billion a year ago due to contributions from associates such as Pinduoduo and increased profits from companies such as Kuaishou and Epic Games. $9 billion. This growth trend started in the second quarter of 2023 and accelerated in the subsequent period. However, the annual growth rate is expected to slow down in the second half of 2024.

In fact, if the impact of investment income, impairment losses, income taxes and other factors are not taken into account, Tencent's Non-IFRS net profit in the second quarter was 57.3 billion yuan, an annual increase of 53%, which also shows Tencent's strong profitability. Tencent's core businesses - value-added services, online advertising, financial technology and enterprise services - all achieved significant positive growth in revenue, gross profit and gross profit margin in the second quarter.

Why is Tencent so successful?

Tencent has successfully achieved significant revenue growth by actively adjusting its internal strategies. It is reported that Tencent has recently focused on those business areas with the highest return on investment, such as WeChat video numbers, Souyisou advertising, small game platform services and video number merchant technical services.

During the earnings conference call, Tencent Chief Strategy Officer James Mitchell emphasized that the transformation of the company's revenue structure towards high-profit sources, as well as the execution of efficiency and cost management plans, are key factors driving the growth of revenue and gross profit in the second quarter. . He further pointed out that although the shift to high-profit revenue sources is an ongoing process, Tencent's gross profit growth is expected to continue to exceed revenue growth in the future, although the driving force for this excess growth may gradually weaken.

However, Tencent management seems to be trying to adjust investor expectations. Among the company's three core businesses, the performance of the online advertising business is particularly outstanding. In the second quarter, revenue increased by 19% year-on-year to 29.9 billion yuan, and gross profit margin also increased from 49% a year ago to 56%. The advertising business is often regarded as a "barometer" of economic development. Mitchell admitted that due to the overall weakness in brand advertising expenditures in the market and the slowdown in consumer spending in China, the pricing of expected advertising revenue per thousand impressions (eCPM) has been negatively affected, which has a negative impact on Tencent's brand advertising and ad network business trends. poses a challenge.