Tencent's Business Is Thriving And It Has Taken Precautions Against The U.S. Chip Export Curbs

Tencent Holdings Limited TCEHY posted impressive third quarter results last week.  The world's largest video game company and operator of the WeChat messaging platform showed that the gaming segment rebounded from China’s tech regulatory crackdown, along with shining advertising sales. Earlier this month, Tencent revealed it made a deal with Meta Platforms META to sell its VR headsets. This move will allow Meta to return to China and face Apple Inc AAPL whose new mixed-reality headset Vision Pro should go on sale early next year.

Tencent’s Third Quarter Highlights

Tencent posted a revenue of 154.6 billion yuan which equates to about $21.4 billion, in line with estimates. This is Tencent’s third consecutive quarter of revenue growth.  

Domestic games revenue rose 5%, driven by titles such as "Lost Ark" and "Valorant", which Tencent launched in July and for the first time in China.

Online advertising business reported revenue rose 20% on the back of strong demand for advertising in its video content. Over the recent quarter, e-commerce companies have "become a much bigger contributor to Tencent’s ad revenue. Tencent also noted that these companies tend to advertise in the second half of the year. 

Tencent’s second-largest segment, financial technology business, also reported a 16% rise as wealth management services and online transactions improved.

Although third quarter margin continued to improve as it got closer to 50% with Tencent eliminating unprofitable business segments, net profit declined 9% to 36.1 billion yuan.

A Deal With Meta

As Wall Street reported earlier in the month, Meta signed a deal with Tencent to sell a new low-cost version of its virtual-reality (VR) headset in China as of late next year. This move marks Meta's return to a market where its platforms Facebook and Instagram are blocked. Besides returning to China after 14 years, Meta gets to compete with TikTok-owner Bytedance, which makes the VR headset Pico. Wall Street Jounral reported that Meta is planning to use lenses in the headset that are cheaper than those in the Quest 3 for the Chinese market.

Tencent Music topped third quarter revenue estimates.

Last week, Tencent-owned Tencent Music reported steady growth in paid subscriptions on its platforms which helped offset the impact of Beijing’s ongoing crackdown on online gambling. Although Tencent Music explicitly prohibit online gambling, regulators started targeting its game-like features such as virtual lucky draws earlier this year due to the possibility of them being abused by malicious users for gambling purposes. In response, Tencent Music removed these features, causing a 48.8%drop in services revenue during the reported quarter after already posting a 24% revenue drop for its social entertainment services in the previous quarter. For the quarter ended in September, total revenue dropped 10.8% to 6.57 billion yuan ($901 million) but still topped LSEG’s estimate of 6.31 billion yuan.

Tencent Is Building Its AI Chip Supply

2022 was one of the toughest years for gaming companies in China that led to an eight month-long freeze in licences for new games and more restrictions on playing time for minors. But the industry rebounded this year as regulators resumed granting licenses and Tencent came back. Although the new U.S. chip export curbs threaten its GenAI model development, Tencent stated it has accumulated a large supply of Nvidia NVDA chips to fuel its short-term AI model development while it seeks domestic suppliers. Tencent was among the first to order the H800 from Nvidia which allowed it to build a good inventory. Although it was not specified when the purchase took place, Nvidia revealed in October that the H800 is on the US export curb product list through a regulatory filing. But in late October, Nvidia disclosed that the announced restrictions took effect immediately which was weeks earlier than expected.

Moving forward, Tencent will be prioritizing high-margin revenue streams and leaving behind less scalable activities.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.