Tencent Signals Gradual China Recovery After Gaming Arm Revives

Tencent Holdings Ltd. described tentative signs of a Chinese economic bounce-back after Beijing unveiled a plethora of stimulus measures, addressing investors’ fears about the trajectory of the world’s No. 2 economy.

President Martin Lau said payment transactions ticked up in October, reversing months of decline, after the government in September trotted out myriad policies to revive consumer confidence. But he cautioned that the various steps will take time to implement, suggesting a recovery won’t be immediate.

Lau delivered that outlook after Tencent posted a better-than-anticipated 47% surge in profit for the September quarter, when the summer release of Dungeon & Fighter Mobile helped China’s most valuable company cope with the downturn. The social media and entertainment leader posted net income of 53.2 billion yuan ($7.4 billion) for the period, surpassing the average projection by about 17%. Revenue rose 8% to 167.2 billion yuan, broadly in line with estimates.

The performance may help shore up expectations Tencent will ultimately prove more resilient to Chinese economic malaise than rivals Alibaba Group Holding Ltd. and JD.com Inc., which are grappling with shell-shocked shoppers. Shares in Prosus NV, a major Tencent stockholder, stood largely unchanged in Europe.

“The economic recovery would take some time,” Lau told analysts on a conference call. “But over the long run, we do believe it would definitely be re-accelerating because we felt there’s a very strong resolution by the government to revive the economy.”

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Tencent kicks off a closely watched earnings season for major Chinese tech companies, just as Beijing’s government unleashes a basket of policy stimulus from rate cuts to debt swaps to reflate the economy.

Its ubiquitous WeChat reflects the economic environment via online services from ride-hailing to meal delivery for a billion-plus users. In the September quarter, the fintech division that incorporates that payments network racked up its slowest growth since the Covid-era depths of 2022.

But in other respects, Tencent’s business is rounding a corner. The world’s biggest games publisher scored this year with the Nexon Co.-produced Dungeon & Fighter Mobile, which is fueling a much-needed turnaround in its core division. Tencent also backed the record-smashing PC hit Black Myth: Wukong, reinforcing its reputation as an industry financier. Those breakout hits helped anchor an unusually popular lineup of games during the summer months, when rivals from NetEase Inc. to Mihoyo also celebrated new hit titles.

Alibaba and JD.com are expected to report accelerated growth when they unveil quarterly numbers later this week. China’s biggest e-commerce platforms issued a raft of numbers showing robust sales during the recently concluded Singles’ Day shopping gala. But analysts also warn it’s too soon to call a rebound.

Despite a blockbuster summer, Tencent is still struggling to come up with a truly original franchise on par with the aging Honor of Kings. The game’s producer, Timi Studios, is trying to expand the battle-arena mainstay into new genres such as open-world and fighting games. Any missteps there could waste years and billions of dollars for a company that’s grown more wary of costs during a downturn.

Outside China, Tencent will again look to its portfolio companies to pick up the slack, thanks to the impending launches of highly anticipated games like Path of Exile 2 and Valorant Mobile. Tencent is even considering a tie-up with Ubisoft Entertainment SA’s founding Guillemot family to take private its embattled French investee, Bloomberg News reported last month.

WeChat remains the crown jewel of Tencent’s online empire, as it channels a billion-plus users into services from mini-games to live shopping and offline payments. On Wednesday, executives touted the potential of what they called mini-shops, a WeChat-based shopping platform that they intend to refine and expand over time.

The Shenzhen-based company has been in talks with Apple Inc. about how to split transaction fees for in-game purchases via China’s ubiquitous super-app, which could unlock a new revenue stream for both companies.

Longer run, Tencent is betting on generative AI much like the rest of the global tech industry, though adoption of its proprietary model and ChatGPT-style tools lags rivals such as TikTok-owner ByteDance Ltd. and Baidu Inc.

AI has helped improve ad targeting, Tencent executives have said, while they explore ways to integrate the technology with existing services. On Wednesday, they cautioned against expecting a surge in AI-related revenue akin to the trend among US cloud players, given China’s less mature enterprise-software market.

“It will take a few more quarters for us to see some real uses cases at scale, and at that point we will provide an update for all of you,” Lau said.