TMTPost -- China’s social media and video game giant Tencent Holdings Limited decided to significantly boost share buyback after it posted weaker-than-expected revenue in the end of last year.

Credit：Visual China

Tencent intended to at least double the size of its share repurchases to more than HK$100 billion (US$12.78 billion) in the year 2024, from around HK$49 billion in 2023, according to a financial filling on Wednesday. The WeChat owner said it proposed to increase annual dividend in the year ended December 31 2023 by 42% to HK$3.40 apiece, equivalent to approximately HK$32 billion, as it returned substantial capital to shareholders in the year through cash dividend, share repurchases, and settlement of distribution in specie.  

The filling showed Tencent’s revenue for the quarter ended December31 gained 7% year-over-year (YoY) to RMB155.2 billion (US$21.6 billion), missing analysts’ projection of RMB157.4 billion. The sales delivered the slowest growth in a year and slowed down from the third quarter that saw a YoY 10% increase. Net income in the fourth quarter also fell short of expectation of RMB33.3 billion as it plummeted 75% YoY to RMB27.025 billion. The drop in profit mainly came from a net loss of RMB6.7 billion on investments and other items that quarter, and a RMB106.6 billion gain from the disposal of its stake in Chinese food-delivery leader Meituan a year earlier. The non-IFRS adjusted net income rose 44% YoY to RMB42.7 billion, better than the projected RMB41.97 billion. The operating profit increased 42% YoY to RMB41.4 billion, versus the estimated RMB46.7 billion, and gross profit climbed 25% YoY to RMB77.56 billion with  gross margin of 50%, up from 43% a year ago.

Tencent attributed improvement of the gross margin to transition to high-quality revenue streams, particularly video accounts ad revenue generated from our own traffic with platform costs already paid for. Its efficiency efforts also led to margin improvement. Tencent Chairman and CEO Pony Ma, or Ma Huateng, highlighted breakthroughs in major products and services as his company sharpened strategic focus, such as Video Accounts’ total user time spent more than doubled, enhancements to the company’s advertising AI model significantly improved targeting performance, and international contribution to its games revenue reached a record 30%. “These developments drove high-quality revenue streams which fueled our gross profit growth of 23%, and supported our plan to step up capital returns to shareholders. Tencent Hunyuan developed into a top-tier foundation model with superior performance in numerical reasoning, logical inference, and multi-turn conversations,” Ma said in the filling.

By segment, Tencent’s bread-and-butter VAS (value-added services) including game and social network business, generated RMB69.1 billion, down 2% YoY. Revenue from international games increased 1% YoY to RMB 13.9 billion, or declined  1% in constant currency terms, reflecting Supercell repositioning some of its games. PUBG Mobile saw a strong upturn in revenue, while VALORANT maintained robust growth. Domestic games, which dragged total revenue more than international titles,  revenue declined 3% YoY to RMB27 billion due to decreased contributions from Honour of Kings and Peacekeeper Elite, partially offset by contributions from our recently launched games, such as VALORANT and Lost Ark. Social networks revenue decreased 2% YoY to RMB28.2 billion, due to lower revenues from music-related and gamesrelated live streaming services, partially mitigated by revenue growth from music subscriptions and Mini Games platform service fees.

Tencent President Martin Lau admitted revenue from domestic game has been soft during 2023, but add the company expected the business to improve from the second quarter of 2024. Lau told analysts at an earnings call that the reason for slow growth in 2023 was that two biggest games, Honor of Kings and Peacekeeper Elite, have maintained their leading positions in terms of daily active use (DAU), but monetization has temporarily stagnated, which caused the company to take remedial actions. For Peacekeeper Elite, it identified the need for more creative monetization strategies and have revamped the leadership of its monetization team. Lau said Tencent expected revenue from the domestic and international to improve from the second quarter of 2024 onwards as revamps for big existing games such as Brawl Stars and Peacekeeper Elite have started to yield results and it will be launching new games, including Dungeon and Fighter Mobile.

Lau responded to the upcoming new rules on games in China at the earnings call. The National Press and Publication Administration (NPPA) issued a draft regulation on online games management last December, which was deemed as further tightening up regulation on the video games. The draft guidelines, which are soliciting public opinion, ask online publishers not to offer inducement rewards such as daily login rewards, first-time recharge rewards, or continuous recharge rewards. It also prohibit the publisher and operator of online games from providing high-priced game props trading through hype or auctions.

Lau said  the regulation is “no longer our concern”, because the regulators have come out very explicitly in explaining that the purpose of the draft was actually to provide a healthy environment for growing the industry rather than constraining the industry, and Tencent is “actually very encouraged by the supportive measures that were unleashed [by the government] after the initial concern was expressed by the market”. He pointed out the regulator has greenlighted a single batch of domestic games in the very beginning of this year, which is more than 100 including Tencent’s flagship mobile game, DnF Mobile, and there's an expedited approval of imported game licenses. Lau further said concern of the new rule focuses on high-ARPU (average revenue per user) games, while ARPU on Tencent games is actually on the very low end of the overall industry. Therefore, it could have limited impact on Tencent games even if the rule imposes limits on player spending in games.