Source: Krafton

Tencent, the world’s largest video game company, released its Q4 earnings and full fiscal year results for 2022 last week. 

In this report, we’ll explore the recent quarter and future trajectory of the gaming side of the Chinese tech titan. Despite a significant amount of gaming revenue, the gaming segment actually comprises just under 31% of the behemoth's total revenue for 2022. As such, we will briefly discuss the other segments, including Social Networks, Online Advertising, and Fintech & Business Services, though we will spend more time diving deep on the company’s gaming division. 

Annual revenue declined by 1% for the year for the first time since Tencent went public. However, Tencent’s performance has started stabilizing on a year-over-year (YoY) basis this quarter while boosting operating profits across all business segments by 19% YoY for the same period (growing operating margin from 23% to 27%). 

Management credits the positive changes to three factors: firstly, implementing cost-cutting measures and focusing on core businesses; secondly, progress made in new, high-quality revenue streams in video and international games; and lastly, an improved macro environment due to post-COVID behavior and the easing of restrictions on domestic game licenses. 

Let’s start with a breakdown of the performance of the gaming segment. Next, we’ll talk about the performance of non-gaming segments. 

Revenue Mix

Games Segment

Tencent got its start in free-to-play gaming by linking games to QQ, a hugely popular chat app it operated in China. Many years later, Tencent is now the clear leader in gaming in China, with some sources suggesting it owns more than 50% of the online gaming market. 

In the early 2010s, Tencent started exploring Western gaming markets as an avenue for growth, and in recent years the pace at which Tencent invests in Western companies has increased (partly to offset CCP interruptions in its domestic operations). What started as a market expansion strategy has since reached more than 800 investments to date and includes full-ownership of League of Legends and Valorant developer Riot Games, Left 4 Dead developer Turtle Rock, and Sumo Group, as well as stakes in Epic Games, FromSoftware, Krafton, Miniclip, Netmarble, Supercell, and Ubisoft to name just a few. 

Tencent is one of the top importers of international titles for the Chinese market and, given its track record, often acts as a publishing and development partner of choice for many Western game makers looking either to bring an existing game property to China or develop one specifically for the Chinese market. 

The company’s gaming segment is made up of domestic games and international titles. Domestic games include revenue generated from the People’s Republic of China (PRC), excluding Hong Kong, Macao, and Taiwan. International games include revenue generated from all regions, excluding PRC.

Tencent Games Revenue Breakdown

Domestic Games

In short, this segment was hit by restrictions on minors plus an extended halt on new game releases in China. Revenue was down 4% for the year 2022 and down 6% for the quarter YoY. The segment generated ¥27.9 billion ($4.2 billion) for the quarter and ¥123.9 billion ($18.6 billion) for the year. 

Tencent continued to comply with CCP’s newer regulations and has implemented a ‘minor protection program’, significantly reducing minors' playtime. 

One notable development in this segment from last quarter is that the MOBA Honor of Kings grew its DAU YoY. The game also had its best-ever Chinese New Year performance with enhanced targeting. Dungeon & Fighter also had a standout quarter, its best Q4 in the last three years in fact. So despite some decline, Tencent’s gaming segment has retained outstanding revenue generation due to its own top-performing days. 

As a corporation, Tencent has also proven itself adept at weathering anti-gaming headwinds the Chinese government has subjected to domestic publishers and developers. Recently, the government has somewhat softened its stance on gaming, which we’ll explore more in detail below. 

International Games

In this seasonally strong quarter, Tencent’s International segment delivered decent growth, contributing 33% of the overall games revenue (up from 28% last year). For the quarter, the segment grew 5% YoY, delivering ¥13.9 billion ($2.1 billion) in revenue; for the full year, it grew 3% YoY and generated ¥46.8 billion ($7 billion) in revenue. 

Similar to domestic games, this segment includes many of the heaviest hitters in the overall gaming industry. Major growth drivers for the quarter included League of Legends and Valorant, which grew in MAU and revenue for the quarter due in part to the addition of a new character and game mode. Other bright spots included TiMi’s (and Activision’s) Call of Duty Mobile, which grew in revenue YoY due to anniversary promotions and World Cup-themed content, and new releases V Rising and Warhammer 40,000: Darktide on PC plus Goddess of Victory: Nikke on mobile. 

Sybo’s Subway Surfers was also added to the mobile portfolio through Tencent-owned Miniclip’s M&A activity, bringing with it the game’s huge and growing user base with more than 4 billion lifetime downloads. 

It’s difficult to fully contextualize all the moving parts of Tencent given the extent to which its business extends into entertainment and technology sectors. But it’s Tencent’s scope and versatility that also gives the company the unique ability to work with so many different third parties and IPs across platforms and media formats. 

Non-Gaming Segment

As we acknowledged, Tencent has other segments in addition to gaming. Here were the major announcements from Tencent’s Q4 release regarding these non-gaming segments: 

  • The ‘Online Advertising’ segment performed well for the quarter, increasing by 15% YoY and delivering ¥24.7 billion ($3.5 billion) in revenue sequentially, but with a 7% decline for the year and a total revenue of ¥82.7 billion ($11.9 billion). The growth was driven by increased ad spending by e-commerce platforms, Fast-Moving Consumer-Goods (FMCG), and games advertisers. The Social and Other segments also made strong contributions to the segment, which was underpinned by strong demand for Video Accounts and Mini Programs ads.
  • Throughout 2022, the average time spent on Weixin (domestic WeChat) continued to increase, driven by Mini Programs (games, e-commerce, etc.) and Video Accounts, which doubled and tripled YoY, respectively, generating more engagement than Moments (similar to Instagram Stories). Video Accounts became a leading short-form video and streaming platform in China.
  • The combined Monthly Active Users (MAU) of Weixin and WeChat reached 1.31 billion at the end of 2022, a 3.5% YoY increase.
  • The Mobile MAU of QQ (instant messaging software and web portal for a variety of services such as games, music, movies, and group and voice chat software) stood at 572.1 million at the end of 2022, a 3.6% YoY increase.
  • On the digital content front, paid video subscribers decreased slightly to 119 million due to content delays. Recently, ‘Three Body’ became China's highest-rated sci-fi series in the last five years.
  • The FinTech and commercial payments business was impacted by COVID outbreaks in Q4, and transaction volume slowed significantly. As consumption in China recovered, daily average commercial volume grew at a double-digit rate YoY in Q1 2023 compared to a high base in Q1 2022.
  • In the cloud and other business services segment, Tencent cut down on loss-making activities while focusing on self-developed PaaS solutions like video cloud and databases.
  • Tencent is investing in their AI capabilities and cloud infrastructure to embrace foundation models, which they believe will improve the experience of their existing products and services while fostering innovation. Tencent notes that AI has already improved their advertising, short-form video, and cloud computing.
  • Recent breakthroughs in AI and foundation models, along with generative AI, will benefit Tencent's core social and gaming businesses, which are user-oriented and involve premium content that is difficult to disrupt with AI, but can still benefit from it. Digital assistance and search are likely to be the next growth areas for Tencent.

Overall revenue hit ¥145.0 billion ($20.8 billion), an increase of 0.5% over Q4 of 2021, while revenue for the full year reached ¥554.6 billion ($79.6 billion), a 1% decrease YoY. Adj. EBITDA for the quarter of ¥49.6 billion ($7.1 billion) stands at a 34% margin, which is up from 29% compared to last year. 

Adj. EBITDA for 2022 came in at a 34% margin, slightly lower than 2021’s 35%. Free cash flow generated for the quarter was ¥23.1 billion ($3.3 billion - down 31% YoY) and for the full year was ¥88.4 billion ($12.7 billion - down 18% YoY). Net debt stood at -¥14.8 billion (-$2.1 Billion) at the end of 2022, an improvement over last year’s -¥20.2 billion (-$2.9 billion). Tencent’s Debt / Adj. EBITDA ratio for the year stands at 1.77x. 

Currently, Tencent is a stable and diversified business with strong profit margins. The company regularly discovers significant opportunities for growth in its popular social apps, particularly WeChat. Additionally, Tencent has a strong understanding of AI and intends to leverage this expertise to its fullest potential, positioning itself as a leading player in China and potentially on a global scale.

Tencent’s Battle at Home

The games industry faced several challenges in 2022, including increased competition from other entertainment options as post-COVID behaviors emerged. Additionally, higher inflation reduced disposable income, supply chain issues resulted in hardware shortages, and many game delays led to fewer major titles being released. Finally, Apple's deprecation of the IDFA posed significant challenges to the mobile gaming sector’s user acquisition efforts and, more broadly, the digital advertising ecosystem on which many mobile games rely. 

Despite being a global gaming giant, Tencent faced unique hurdles in its home market of China, too. One such challenge was the Chinese government's stringent policy limiting minors' access to gaming to only one hour per day on holiday evenings and weekends (not to mention outright banning gameplay on school nights) in an effort to curb game addiction. Luckily, this had a minor impact on Tencent, affecting only about 1% of their top-line revenue, since minors are not major spenders.

One of the more significant challenges Tencent faced in the Chinese market was the government's restrictions on new game licenses. Throughout this process, Tencent went without approval to publish new games for 18 months, between May 2021 and November 2022. This restriction had a more sizable impact on Tencent's business operations, reducing revenue for 2022 in the domestic games segment. 

It should be acknowledged these restrictions had a profound impact on the entire Chinese game industry. In the second half of 2021, 14,000 game studios shuttered as a result of being blocked from entering the market, according to NewZoo. One could argue that Tencent’s grip on the domestic market became stronger since so many upstarts and potential future competitors were forced to exit. This isn’t great for a healthy competitive dynamic in the market, but it is net-favorable for Tencent assuming that the market does truly rebound. 

Recent game approvals of Tencent.
Recent game approvals of Tencent.

The company did say it believes recent approvals indicate an easing of restrictions. Interestingly, the Chinese Communist Party (CCP) has recently recognized the gaming industry's significant economic contribution. This position contradicts statements from a year ago, in which CCP officials labeled video games as the equivalent of “spiritual opium,” implying that gaming was no different than drug use. 

Games Approved in China

Tencent has encountered difficulties in obtaining approval for its games in the past. Similar restrictions in 2019 affected both Tencent and its competitor NetEase, limiting their ability to release new games for nine months. It is difficult to anticipate the actions of the CCP in the future, and the recent change in sentiment does not guarantee a more consistent and reliable attitude toward gaming. Thus, any plans that Tencent may have for the domestic market should be approached with caution, as it is currently impossible to accurately predict how the CCP's agenda may impact gaming.

Domestic Growth

Despite facing various challenges, Tencent managed to generate significant domestic gaming revenue, demonstrating the resilience of their titles and the loyalty of the audience it’s built up over the many years. The popularity of its games in the Chinese market is undeniable, with successful titles including Honor of Kings, Dungeon & Fighter, Peacekeeper Elite, CrossFire, QQ Speed, PUBG Mobile, Chess Rush, and QQ Dance.

Looking to the future, Tencent has three underlying strategies that they plan to implement as restrictions on their domestic activities ease up and they are able to publish new games. These strategies are not new, but rather ones that Tencent has been executing since the early 2010s, as they aim to return to business as usual.

  1. Publishing Leading International/Western Franchises in China

Ironically, pressure from the CCP also gives an advantage to larger Chinese publishers, as Western companies cannot publish games in China without a Chinese partner. This can sometimes result in a lower revenue cut of 10-20% for foreign publishers. This gives Tencent, the dominant player in the market, an edge when Western publishers with established titles are contemplating entering the Chinese market. For instance, Amazon Games and SmileGate recently teamed up with Tencent to release the MMORPG Lost Ark in China. 

Tencent's domestic power is further demonstrated through its ownership of highly successful Western developers, which allows them to bring successful global hits to the Chinese market at the right time to capitalize on growth. For instance, Tencent published League of Legends: Wild Rift, the mobile version of League of Legends, in China, as well as the tactical shooter Valorant. These two games are owned and operated by Riot, itself a subsidiary of Tencent.

That being said, fewer international publishers have shown interest of late in publishing games in China, given the more difficult logistics involved and ongoing political tensions. When Tencent is a majority shareholder in a company, the company is likely to have more sway in bringing games to China, as is the case with Riot. Tencent buying stakes in major publishers and IP holders like Epic and Ubisoft could also encourage these studios to bring more titles to the domestic market. Klei Entertainment’s Don’t Starve Newhome was approved for the Chinese market in December 2022, and Tencent became a majority stakeholder in the company as of January 2021

With regards to publishing new games domestically, Tencent has adopted a dual strategy we’ll detail below. 

2.New Games and New Genres

Tencent's strategy involves keeping an eye on emerging popular game genres and releasing titles in those genres to take advantage of the growing player base. For instance, the open-world survival craft genre has gained popularity in recent years with games like Rust and Valheim. Tencent has responded to this trend by releasing Undawn in China. The management reports that Undawn has achieved the highest gross bookings among all mobile games in China so far this year (2023).

3.Popular IP with Genre Expertise

Tencent plans to leverage their expertise in certain genres, such as Shooters and Chess, by publishing some of their already popular intellectual properties (IP) in those genres. While they have not yet disclosed which IPs they intend to bring to these genres, they have recently started obtaining permission to publish games, suggesting that these plans may materialize soon.

International Growth

During the conference call, Tencent's management emphasized their focus on cost-cutting measures. However, they also confirmed that they are still actively looking for investment opportunities abroad. In addition, they mentioned that their current market share in the $150 billion international games market is in the mid-single digits. This suggests that there is substantial room for expansion in this area, and Tencent is eager to pursue it since there is greater freedom and fewer restrictions (to some extent) in comparison to the domestic market.

Tencent has multiple avenues for growth, and we anticipate it will utilize all the strategies at its disposal to expand internationally. Here are the four major growth opportunities we expect the company to focus most heavily on going forward. Again, none of these are new, but they’ll lean into them to different amounts in the future compared to the past.

IP Expansion

As we’ve discussed, Tencent boasts not only a robust domestic portfolio of games but also an impressive international portfolio. Tencent is familiar with exploring the possibility of publishing popular titles on other platforms, such as developing a mobile version of Valorant, a PC-native tactical shooter, and releasing Nikke on PC after its successful launch on mobile.

While cross-platform aspirations are not unique to Tencent, the company's blockbuster titles and track record set it apart from the competition. However, bringing over PC/console titles to mobile in the current market is challenging. Although Tencent has had great success with PUBG and Call of Duty's expansion into mobile (via partnerships), its mobile counterpart for League of Legends, Wild Rift, has not achieved the same level of success as PUBG or CoD in the West (even though their titles make up for any loss domestically). A game as popular as Valorant may prove different, but that remains to be seen. Failures are common; EA’s Apex Legends Mobile (developed by Tencent’s Lightspeed) was shut down shortly after launch, and both Garena Free Fire Max and PUBG: New State weren’t able to reach their prequels’ successes. 

Another way Tencent has been expanding its IP is through genre expansion. As an example, Riot Forge (under Riot Games) has been developing new games within the League of Legends universe, but in genres other than MOBA. With these games, they are trying to engage and monetize their existing user base, which is enormous through premium titles. Riot also participated in transmedia initiatives with the animated series Arcane, telling a story of several League of Legends characters in collaboration with Netflix. 

We believe that Tencent is uniquely positioned with its extensive resources and partnerships to successfully execute cross-platform expansion, which is the most ambitious growth strategy in the industry. Tencent's main objective is to replicate the success of their IPs on different platforms, allowing them to expand and monetize across the entire gaming ecosystem. When executed successfully, this strategy has the potential to add substantial value and is the most critical growth lever at Tencent's disposal.


Tencent is no stranger to billion-dollar deals, but its approach is notably different to that of competitors like Embracer Group. Rather than pursuing deals purely based on achieving revenue or EBIT scale, Tencent is typically looking to buy development expertise (of a company with specific expertise in a certain genre), early-stage bets (in the process of launching a promising new title or have recently released a successful title), or a gaming IP that transcends a specific genre. 

In Europe, Tencent mostly cuts minority stake deals with a few exceptions like Supercell, and these minority investments build the foundations of growing partnerships for the future, either through Tencent bringing promising titles to China or working in partnership to develop additional games backed by Tencent. In its latest earnings call, the company highlighted V Rising from Stunlock and Darktide by Fatshark as promising new titles, and this is likely to continue as Tencent applies this strategy to more of its portfolio. Going forward, however, Tencent is reportedly looking to acquire more majority stakes in companies throughout the West and also the Asia Pacific region. 

Tencent plans to continue its pursuit of international M&A, but with a more selective approach, particularly with larger transactions. Smaller acquisitions will probably continue since Tencent is focused on the long-term game and they are less likely to draw regulatory scrutiny. Therefore, we believe that deal-making will remain one of the primary growth levers for Tencent going forward, especially once the M&A climate warms up again.

Studio Creation

Tencent is expanding its global presence by establishing studios in different development hubs worldwide. TiMi and Lightspeed studios are leading the way in this approach, with new offices being set up around the world. For example, Lightspeed has offices in various countries such as the U.S., Canada, Singapore, the U.K., France, Japan, South Korea, New Zealand, and the UAE, with local executives overseeing operations.

Tencent is targeting international audiences with its AAA console game being developed by Lightspeed L.A. The office had 83 employees in September 2022 and plans to increase the workforce to 200. Despite its Chinese roots, Lightspeed L.A. culturally and philosophically aligns with Western audiences, focusing on developing Western titles.

In the future, Tencent will likely continue to open new studios and expand existing ones to sustain its international growth. The projects launched by these studios will target Western users, and if successful, Tencent's head office may introduce these IPs in China. This strategy will enable Tencent to maintain its position as a global leader in the gaming industry by catering to diverse audiences and tapping into different markets while continuously innovating. This strategy is also cheaper than M&A, can offer more upside when published titles do well, and bypasses the scrutiny of international government agencies. 

Thus, given all these factors, we think it’s very likely Tencent will keep using “Studio Creation” to bolster its international presence by opening up new studios and growing the existing ones. Although it remains to be seen what kind of titles these new studios will put forward, in the next few years we should have a better idea. However, if the games do well, this strategy will be a worthwhile endeavor for Tencent. 


Tencent has generated substantial revenue from co-development deals, whether international or domestic. However, future collaborations with US-based developers may prove more challenging. For instance, the Lightspeed and EA collaboration on Apex Legends reportedly faced significant hurdles. Communication challenges, time-zone differences, and varying working styles often plague Chinese and US-based collaborations. Some believe that Activision is looking to wind down CoD Mobile and avoid partnering with a Chinese developer for their next Call of Duty mobile game due to these reasons (in addition to keeping more of the upside in their own pockets). EA and Tencent are not alone in their struggles, as the fallout between NetEase and Blizzard also illustrates.

There will always be demand for content and thus co-development deals, and given Tencent’s track record, there will be other companies looking to work with them. However, we think these may be farther in between, and not a lever of growth Tencent will rely too much on going forward given all the difficulties of collaboration between Chinese and Western studios. 

Key Takeaways

Tencen’t stock
A look back at how Tencen’t stock has trended since the initial approvals on domestic titles in November

Tencent has abundant resources at its disposal, enabling it to continue operating its existing popular games while also venturing into new games, studios, and acquisitions. Their success in developing new hits for PCs and consoles and expanding them to mobile platforms is commendable. Their game studios possess exceptional talent in creating and operating games while maintaining top-notch quality.

Looking ahead, Tencent's ability to innovate domestically in China, where it is the largest player, is important for its continued growth. However, forces beyond their control have hampered progress, and success depends more on the whims of the CCP than anyone would like. Nevertheless, there is still room for growth in the domestic market if they can re-establish their footing by developing new games and publishing Western hits. Naturally, the new wave of game license approval will also reaccelerate domestic growth. 

While the domestic market remains important, the international market presents a bigger long-term growth opportunity. In this arena, Tencent will be looking to bring China-made games to new markets, as well as emphasizing the development of new Western games utilizing foreign studios that are built from the ground-up. The company will continue to pursue targeted M&A when feasible (though this may be hampered by geopolitical tensions), and its subsidiaries have some of the best IP in the games business. With Tencent’s support, those studios can take that IP to new platforms or new genres. Management notes they hope to have half of their revenue come from international sources (currently, it’s at 27%). 

On the other side of the coin, the unstable nature of CCP poses a continuous threat to Tencent. It is uncertain how CCP's future agenda will impact Tencent, making it challenging to predict their long-term stability. While Tencent is well-prepared to withstand challenges like licensing freezes, it is not invincible, and its top line in the domestic markets will still suffer if it cannot launch new games or if consumers are restricted from playing or spending money on them as they have in the past. 

The Bottom Line

Investors and analysts are optimistic this quarter, mainly citing the easing of restrictions in the domestic games market, surging discretionary / advertising spending by consumers and corporations in China post-COVID recovery, Tencent's popularity in short-form video, and the CEO's focus on trimming costs. The local approvals of blockbuster titles like Valorant (expected to be released in Q2/Q3 of 2023) and Pokemon Unite (slated for a 2023 release) domestically have also contributed to the positive outlook.

As a result, per Bloomberg, analysts have increased their price target by 17% since the start of the year, and earnings forecasts have risen by approximately 5%. With Tencent's strong position in the industry and a pipeline of new games, investors are hopeful for growth in both domestic and international markets going forward.

Tencent Profit Forecast

We are cautious about the CCP's stance towards games. It's uncertain whether the CCP will maintain its current favorable attitude towards the private sector, or if they will once again express concerns about its growth and priorities. Additionally, Chinese video regulators are reportedly planning to scrutinize short-video content, which may result in further restrictions on WeChat in the future.

ByteDance’s TikTok poses a potential threat to Tencent in the advertising market, but increased scrutiny over short-form video could potentially weaken TikTok's hold on domestic advertising, too. The regulation of short-video content is a double-edged sword for Tencent in this context. Moreover, recent geopolitical tensions between China and the West may put Chinese companies' listings on foreign exchanges at risk. Therefore, given all the underlying risks and uncertainties, we suspect recent positive investor sentiment should be held tentatively.

A big thanks to Enes Eterkin for writing this update! If Naavik can be of help as you build or fund games, please reach out.

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