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Tencent reported that online games revenue reached RMB30.3billion, representing a 25% growth year-over-year. International markets contributed 23% of total games revenue. This significant growth reflects the strong performance of PUBG Mobile and Call of Duty Mobile (which Tencent develops) in addition to the consolidation of Supercell’s results. Also, it was offset by the decline of PC client games; particularly Dungeon & Fighter.

*The contribution from Supercell titles starting from this quarter is the main driver of the growth in this traditionally low season. Call of Duty Mobile delivered a strong initial performance in overseas markets in October, but its user engagement dropped in November rapidly. The Zombies Mode update brought an uptake in December but this fluctuation indicates a further decrease in engagement if the game lacks frequent updates. Also, the game’s publisher is Activision in the West, which suggests only a slight revenue share is allocated to Tencent. As a result, the game is unlikely to become a major revenue contributor to Tencent in 2020 unless it is launched in China very soon.

*The decline of PC client games is not surprising as the 11th anniversary activities of Dungeon & Fighter were not well-received by gamers, resulting in a stagnant paying user rate and ARPPU. It is true that Teamfight Tactics brought new life to League of Legends, but its less-aggressive monetization model suggests minimal compensation for the loss from DNF. However, we are likely to see considerable recovery of the PC games sector in Q1. The coronavirus outbreak restricted travel during Chinese Lunar New Year, which spurred sharp revenue growth in the peak season across both PC and mobile sectors.

*The epidemic offers Tencent a great opportunity to expand its “Industrial Internet”-related businesses: namely cloud services and education, as well as video streaming services. We are likely to see growth of Tencent’s cloud computing and work-from-home software penetration in Q1, which is in line with Tencent’s overall strategy. However, as a result, Tencent could further direct more resources to other business sectors rather than games. Gaming remains the most substantial business segment for Tencent, but may no longer be a major growth driver.

*We believe the epidemic will accelerate Tencent’s gaming business growth in the short term as users have more spare time at home to spend on games. But, in the long term, it might disrupt the gaming industry similar to other industries. In contrast to the benefits for legacy games, having to work from home impacts the development progress of Tencent’s games pipeline, and thus it must delay the launch schedule for new games. Also, the blow to China’s macro-economy in relation to potential supply shortages and stagflation and could also hurt the overall consumer spend on games gradually.