Tech,  Wealth

Tencent’s Strongest Semiannual Earnings in 10 Years: Cost Reduction Drives Profitability

This may have been Tencent’s financial report with the fewest extraneous factors influencing results in the past two years.

After the closing bell on the Hong Kong stock exchange on August 16th, Tencent released its interim report for the first half of 2023. In general terms, it can be described as showing “increasing revenues and expanding profits”, with the sterling 24% growth in net income far surpassing the more modest income expansion, solidifying their approach of cost reduction and heightened efficiency. This serves as an affirmation of their strategy.

In fact, in order to further optimize operations, Tencent has indeed spared no exertion across all spheres, incorporating “streamlining” internally, flattening the management structure, and promoting a less hierarchical organization.

In June of this year, Tencent recalibrated their ranking system, abolishing the original six- and eighteen-tier framework (ranging from 1.1 to 6.3) and optimizing the professional level system to a simplified fourteen tiers (4 through 17). The professional designation between the two is now uniformly replaced with “professional rank + job title”.

An insider at Tencent told Caijing that the company may consider further trimming superfluous managerial roles and abbreviating reporting lines. “The corporate culture department has already begun sending signals, specifically addressing issues like superfluous hierarchies, bloating payrolls, and prolonged reporting chains.”

Various indicators reflect that Tencent’s initiative to bolster efficiency whilst curbing expenditures remains ongoing, and the “midlife crisis” has yet to fully abate.

When efforts to reduce costs and heighten efficiency take shape

As the highest valued listed company on the Hong Kong stock exchange, Tencent Holdings has now unveiled its robust midyear report card. Where do opportunities for growth lie, and how far along is their endeavor to optimize costs whilst maximizing output? These are the pivotal issues worthy of scrutiny.

The latest financial figures show that in the first half of 2023, Tencent Holdings’ revenue reached 299.194 billion yuan, an 11% year-on-year increase; net income amounted to 53.417 billion yuan, growing 24% from the previous year. Compared to equivalent prior year periods, this represents the strongest semiannual showing since Tencent Holdings went public.

Specifically, the company’s three core sectors – value-added services (including gaming and social media), financial technology and enterprise services (including payment service charges, wealth management product income, and Tencent Cloud etc.), and online advertising – all expanded to varying degrees, posting year-on-year growth rates of approximately 6.32%, 14.55%, and 25.5% respectively, contributing 51%, 33%, and 15% of overall revenue in turn. Gaming remains Tencent’s largest revenue generator, though advertising is growing most rapidly.

Why is this report described as containing the “least extraneous moisture”?

In the first half of 2023, Tencent Holdings’ non-operating gains and losses, incorporating profits from asset sales and fines paid, totaled 2.349 billion yuan, accounting for a modest 4.52% of current net income. Since 2014, the magnitude of non-operating factors reported in Tencent Holdings’ interim statements has gradually risen from 3.601 billion yuan to 27.554 billion yuan, with their influence on net profits swelling from 29.29% to 65.55%. Stock movements constituted the primary driver.

In other words, if the 2.349 billion yuan in non-operating income is excluded (as it relates more to exceptional items than core business), the 49.66 billion yuan in core net profits for the first half of 2023 would represent their most robust first half showing over the past decade.

Tencent’s realization of such results is intimately tied to their initiative over the past year for “cost reduction, efficiency enhancement, trimming excess, and honing core strengths”.

From the perspective of gross margins, Tencent has indeed, as mentioned in their 2022 financial report, placed greater focus on businesses exhibiting robust profitability, while downsizing or retreating from less lucrative sectors – a move yielding meaningful profitability expansion.

In the first half of 2023, Tencent’s aggregate gross margin improved by almost 4 percentage points year-on-year. Among them, while the gross margin for financial technology and enterprise services remains the lowest, it has expanded most swiftly in recent years, reaching 36.44% for the first half – emerging as the primary driver of heightened overall margins.

error: Content is protected !!