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Tencent posts strong Q1 earnings, readies investment boost despite regulatory risk

Written by Song Jingli Published on     2 mins read

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Tencent increased its profits to USD 7.3 billion in the first quarter.

Chinese internet giant Tencent on Thursday struck a confident tone about potential regulatory risks at home, shortly after posting strong earnings for the first quarter of the year.

“It’s actually relatively manageable,” said president Martin Lau, referring to the regulators’ request last month for an internal review to avoid systematic financial risks. Tencent’s consumer lending business is relatively small compared to Ant Group, whose IPO was scuttled in November 2020. Ant faces new restrictions on its lending business and is charting a new path for its future.

While Tencent’s president didn’t elaborate on the matter, chief strategy officer James Mitchell saw possible headwinds from regulatory activity in the online education sector—which is among the top five advertisers in China—that could affect the firm’s ad revenues.

“Tencent’s management is avoiding the real problems on the regulatory side,” said Liu Xu, a researcher with the National Strategy Institute at Tsinghua University. He pointed out that the State Administration for Market Regulation may disclose the results of its antitrust probe into Tencent’s music streaming business this or next weekend and suspects that the company has already received a preliminary notice on the penalties.

Reuters reported in late April that Tencent “should expect a fine, give up exclusive music rights, and may even be forced to sell the acquired Kuwo and Kugou music apps,” referring to people with direct knowledge of the matter.

Further investments

Beyond the regulatory woes, Tencent’s management told analysts that it will be stepping up investment in business services and software, as well as games and short-form video products.

Lau said that the firm is funding the development of innovative games in emerging verticals. It is building up IP franchises suitable for games and expanding them across media. And it will step up marketing expenditure to attract bigger audiences to new games, as well as invest in new areas such as cloud gaming.

Regarding short videos, Lau said that Tencent is investing to see how Chinese consumers’ appetite for short-form videos is evolving. It will provide resources and creation and monetization tools to creators of video accounts within WeChat.

Tencent generated RMB 47.8 billion (USD 7.3 billion) in net profits in the first quarter, a 65% increase YoY, based on RMB 135.3 billion (USD 20.6 billion) in revenue, up 25% year-on-year. Its game business took in RMB 43.6 billion, 17% more than in the same period last year. Online advertising contributed RMB 21.8 billion, up 23%, while fintech and business services accounted for 39 billion, up 47% from last year.

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