Tencent: Financial technology and enterprise services revenue contribution increased to 27% in 2019

According to Tencent's 4Q19 financial report, Tencent continues to achieve remarkable results in all aspects. In terms of social networking, WeChat mini-program payments exceeded 800 billion yuan. In terms of games, overseas game revenue accounted for 23% in the fourth quarter. The number of paid video members exceeded 100 million, and the loss was reduced to less than 3 billion yuan, which is much better than the industry level. In terms of financial technology and enterprise services, in the fourth quarter, as Tencent strengthened its penetration into offline business, the average daily commercial payment volume exceeded 1 billion.

The figure below shows Tencent’s key financial summary data for the fourth quarter and the full year of 2019.

Tencent's main platforms still maintained their leading position in the industry in the fourth quarter. WeChat MAU reached 1.165 billion, QQ mobile MAU reached 647 million, and Qzone mobile MAU was 507 million.

The impact of the COVID-19 pandemic on Tencent's business is shown in the figure below. Mobile payments are significantly affected because many payments take place offline. Due to the reduction in business activities, not all of these offline payments can be transferred online. Some advertisers in the advertising business are affected, but overall it is still growing year-on-year. Cloud services will slow down due to delays in project implementation. In the smart industry, enterprise WeChat and Tencent Conference traffic have grown rapidly. Mini programs and digital entertainment traffic have increased because users spend more time at home.

During the COVID-19 pandemic, Tencent's health-related businesses have grown rapidly. For example, Tencent Health Code has become the most widely used electronic pass for health and travel records during the pandemic. Since its launch in February this year, the health code has been used by 900 million users in more than 300 counties and cities, with a cumulative visit volume of 8 billion times.

Remote work is experiencing strong growth. Less than two months after its launch, Tencent Meeting’s DAU exceeded 10 million. The number of service requests received by WeChat Work during the epidemic increased more than 10 times. WeChat Work is not only an internal communication tool, but can also be connected with WeChat to become a CRM tool for enterprises. This is its unique competitive advantage.

Despite lagging behind its competitors, Tencent continues to invest in Weishi, with DAU increasing by 80% and video uploads increasing by 70% in the fourth quarter. The platform increases user engagement through interaction and gameplay innovation, and enriches the content created by MCN and celebrities through rich content IP.

The overseas expansion of games has made progress, with overseas game revenue more than doubling year-on-year, accounting for 23% of the total online game revenue. By the end of 2019, five of the world's top ten most popular mobile games were developed by Tencent. In addition to creating original IPs, Tencent has also invested in top game studios in various categories around the world.

The company's revenue continued to grow, thanks to the growth of WeChat payment, wealth management, micro-loans and other businesses. The company's financial technology and enterprise service revenue grew the fastest, and its share of revenue increased from 23% in 2018 to 27% in 2019. This also pushed the company's overall revenue to 377.3 billion yuan.

Revenue from value-added services increased by 20% year-on-year and 3% month-on-month to RMB 52.3 billion, of which games increased by 25% year-on-year and social network games increased by 13% year-on-year.

In 2019, the number of paid value-added service accounts increased by 12% year-on-year to 180 million. Due to the delay of program broadcasts, the growth rate of Tencent Video members slowed down, but still reached 106 million. The full-year loss of the video business was reduced to less than 3 billion yuan, far below the industry level; in the second half of 2019, benefiting from the streaming payment model, the number of paid users of live broadcast business and music accelerated. Due to competition from free reading services, the number of paid reading users has been weak for most of 2019, but as more and more people use WeChat Reading, the value of high-quality content is recognized by users, and the business shows signs of improvement.

Total smartphone game revenue increased 37% year-on-year to RMB 26 billion, mainly benefiting from the growth of Honor of Kings, Game for Peace and the international market. PC client game revenue decreased 7% year-on-year to RMB 10.4 billion.

In terms of Tencent's social networking business, WeChat mainly focuses on making more business connections, while QQ focuses on entertainment and meeting online learning needs.

In terms of online games, Tencent continues to maintain its leading position in China. While maintaining its existing popular games, it also launches new games and continues to expand overseas markets. See the figure below for details.

Online advertising business grew 19% year-on-year and 10% month-on-month to RMB 20.3 billion. Tencent increased the maximum daily advertising exposure per person in WeChat Moments from two to three at the beginning of the year, and successfully tested the fourth at the end of the year. Advertising alliances accounted for a significant share, achieved strong growth, and operating profit also improved; the postponement of TV series and the reduction of NBA game advertising had a negative impact on media advertising business.

Fintech and enterprise services grew 39% year-on-year and 12% month-on-month to RMB 29.9 billion. WeChat Pay strengthened its offline merchant penetration, with an average daily number of commercial payment transactions exceeding 1 billion in the fourth quarter, more than 800 million monthly active accounts, and more than 50 million monthly active merchants. Wealth Management Platform Wealth Management further expanded its mass market business, with asset holdings increasing by more than 50% year-on-year and the number of customers more than doubling year-on-year. WeBank provides a small loan product "WeChat Micro Loan" within WeChat, and the loan balance of this product has grown rapidly, while the non-performing loan ratio has remained at a low level.

Below is Tencent's income statement data. Total revenue in 4Q19 was 105.8 billion yuan, up 25% year-on-year and 9% month-on-month. Excluding the impact of the Supercell merger, total revenue increased by 21% year-on-year and 6% month-on-month. Gross profit was 46.1 billion yuan, up 31% year-on-year and 9% month-on-month. Operating profit was 28.6 billion yuan, up 65% year-on-year and 11% month-on-month.

Under Non-IFRS accounting standards, operating profit in the fourth quarter was 30.3 billion yuan, a year-on-year increase of 35%. The full-year operating profit margin was 114.6 billion yuan, with an operating profit margin of 30.4%.

In terms of business, VAS's gross profit margin was 50.1%, down 3.3 percentage points year-on-year. The year-on-year decline was mainly affected by the increase in the proportion of low-gross-profit game revenue. The month-on-month decline was mainly affected by the increase in the cost of e-sports events in this quarter.

The gross profit margin of online advertising was 54.3%, up 17.7% year-on-year and down 5.5 percentage points month-on-month, mainly due to the lower content costs of content video advertising and the increase in the proportion of high-gross-margin social advertising.

The gross profit of the fintech business was 28.1%, up 3.6 percentage points year-on-year and down 0.4 percentage points month-on-month. The year-on-year increase was mainly due to the increase in the proportion of high-profit commercial payments. As more and more users use wealth management and micro-loan businesses, this has also driven the year-on-year improvement in profits.

Sales and marketing expenses were RMB 6.7 billion, up 17% year-on-year. The year-on-year increase was mainly due to marketing expenses for financial technology and cloud services, smartphone games and digital content services. The proportion of marketing expenses to revenue decreased from 6.7% in the same period last year to 6.3%, mainly due to the reduction of inefficient marketing expenses.

Administrative expenses were RMB 16 billion, up 41% year-on-year, mainly due to the increase in R&D expenses and the impact of the merger with Supercell. R&D expenses were RMB 8.9 billion, up 49% year-on-year and 12% month-on-month.