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As Trump Administration Seeks WeChat Restrictions, Tencent Profit Surges

08/12/2020 | 12:16pm EST

By Jing Yang

Tencent Holdings Ltd. downplayed threats from the Trump administration's potential restrictions on its flagship WeChat app, as increased spending through its services and videogames pushed the Chinese internet giant to better-than-expected profit and revenue in the second quarter.

Tencent, the world's biggest videogame company by revenue, said its profit in the June quarter grew 37% to 33.1 billion yuan ($4.8 billion) from the same period last year, helped by its mobile-game business. Revenue rose 29% to 114.9 billion yuan. Both beat analysts' estimates, according to FactSet.

In addition to gaming, Tencent also posted revenue growth in all of its major lines of business, including fintech, cloud services and online advertising.

Tencent said Wednesday based on its analysis, the Aug. 6 executive order only applies to the international version of WeChat, meaning the majority of the app's business, as well as other business segments, will be intact. "We are in the process of seeking further clarification from relevant parties in the U.S.," Chief Financial Officer John Lo said on an earnings call.

Tencent, with headquarters in Shenzhen, has been caught in the crossfire of geopolitical tensions between China and other countries. The White House last week issued a surprising executive order -- due to take effect Sept. 20 -- that will bar people in the U.S. or subject to U.S. jurisdiction from transactions involving WeChat or with any Tencent subsidiary. U.S. officials have said the app poses a national-security threat because it captures wide swaths of information and could place the personal data of Americans and from Chinese nationals visiting the U.S. in the hands of the government.

In June, India blocked WeChat, along with dozens of Chinese apps, on cybersecurity concerns as tensions intensified with China following a deadly border skirmish.

The White House's action -- which also targeted Chinese short-form video app TikTok -- escalated a long-simmering tech war between the world's two largest economies. With a market value of more than $640 billion, Tencent is one of the most profitable Chinese companies and is the country's second-largest internet company after Alibaba Group Holding Ltd.

WeChat and its domestic sister app Weixin have about 1.21 billion monthly active users combined. On Wednesday's earnings call, Tencent executives sought to distinguish the two different apps and allay investors' fears that the ban could hurt its domestic businesses. Tencent shares -- which had been trading at record levels -- are down nearly 6% in the four trading days since the order was signed.

The company generates less than 2% of revenue from the U.S., said Chief Strategy Officer James Mitchell. The executive order "clearly covers the U.S. jurisdiction, and consequently, we don't see any impact on companies advertising on our platforms in China," he said. International brands including Starbucks Corp. and Procter & Gamble Co. use Weixin -- which means micromessages in Mandarin -- to market their products and services to consumers in China.

Although WeChat has far fewer local users in the U.S. than TikTok, the app is a crucial communication channel for the Chinese diaspora and foreigners who have business or personal ties in China. Silicon Valley has taken the cue of WeChat's super-app model by building products with functions spanning across messaging, payments and e-commerce.

"For Tencent, WeChat means everything," said David Dai, senior research analyst at Bernstein C. Sanford. Almost all of the company's business, from gaming and advertising to videos and payments, is more or less dependent on WeChat, he said referring to both WeChat and Weixin.

In the latest quarter Tencent's revenue from smartphone games jumped 62% from a year earlier to 36 billion yuan, driven by increasing popularity of such titles as "Peacekeeper Elite" -- a domestic clone of Tencent's international hit "PUBG Mobile" made for the heavily censored Chinese market -- and "Honor of Kings." Tencent, as well as large videogame companies in the U.S., has been a beneficiary of the coronavirus pandemic, as homebound consumers increasingly turn to online entertainment to cure lockdown blues.

"Results from gaming are extraordinary," said Benjamin Wu, a senior research analyst at research firm Pacific Epoch.

Write to Jing Yang at Jing.Yang@wsj.com

 

Stocks mentioned in the article
ChangeLast1st jan.
ALIBABA GROUP HOLDING LIMITED -0.80% 277.72 Delayed Quote.30.94%
CHINA LITERATURE LIMITED -0.75% 59.3 End-of-day quote.82.46%
SANFORD LIMITED 0.20% 5.06 End-of-day quote.-36.35%
STARBUCKS CORPORATION -0.10% 98.2 Delayed Quote.11.81%
TENCENT HOLDINGS LIMITED 2.27% 586 End-of-day quote.56.02%
UNITED STATES DOLLAR (B) / CHINESE YUAN IN HONG KONG (USD/CNH) 0.01% 6.5643 Delayed Quote.-5.54%
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