China slowdown creates cheap thrills for Tencent

HONG KONG: China’s economic woes have gifted Tencent an unexpected silver lining. The $400 billion technology titan on Wednesday unveiled quarterly sales growth that was a tad disappointing.

But the country’s gloomy economic backdrop is prompting consumers to shift spending to low-cost entertainment.

That should boost the company’s lucrative video-games and advertising businesses.

Results for the three months to the end of June were mixed. Revenue rose a decent 11% to 149 billion yuan ($20.4 billion), but fell slightly short of the average analyst forecast compiled by Refinitiv.

Worryingly, sales from domestic games, which accounted for over a fifth of Tencent’s top line, were flat from a year earlier, partly due to the company releasing less new content.

The high-margin online advertising division, though, was a bright spot, with revenue up 34%.

That helped lift Tencent’s overall adjusted operating profit margin by 6.2 percentage points to 33.6% from last year’s second quarter.

Against this week’s torrent of grim news from China’s economy, spanning falling home prices, plunging new bank loans, weakening monthly industrial output and a liquidity crisis at a major Chinese asset manager, executives at Tencent still managed to strike an upbeat tone.

Growth in domestic games should resume in the next few months on the back of new releases, while advertisers are expected to keep spending on Tencent’s videos, games, social networks and other apps.

In fact, James Mitchell, the company’s chief strategy officer, reckons video games will benefit as consumers pare back on big-ticket luxury items and look for “affordable entertainment-driven experiences” instead.

Analysts at Citi estimate this summer’s movie ticketing sales to be as much as 16 billion yuan, roughly 90% of the pre-pandemic summer box office.

After rising roughly 5% since the start of the year, shares of Tencent now trade at 18 times forecast earnings for the next 12 months, per Refinitiv, well above e-commerce-focused tech peers like Alibaba.

It pays to have cheap thrills.