Tencent Profit Beats on Investment Gain, No Progress on China Gaming

Tencent beat third-quarter profit forecasts on Wednesday but gave no update on a regulatory block in China, the world's largest gaming market, that has damaged its core business.

China has imposed tougher rules on the gaming industry, including a halt to new game approvals as part of a regulatory overhaul and calls to tackle addiction among young people.

Tencent, China's biggest gaming and social media group, said profit in the July-September quarter rose by 30 percent to CNY 23.3 billion (roughly Rs. 24,200 crores), beating an average analyst estimate of CNY 19.32 billion (about Rs. 20,100 crores), thanks largely to investment gains.

Although Tencent's revenue rose by 24 percent to CNY 80.6 billion ($11.6 billion or around Rs. 83,800 crores), this represented its slowest quarterly growth in more than three years.

Analysts said Tencent's mobile gaming growth was better than expected, but the fact that its president Martin Lau had no news on China's gaming regulation raised margin pressure concerns.

"We are waiting for the government to start the approval process," Lau said on an earnings call.

Tencent shares, which more than doubled in 2017, have dropped by about a third so far this year, wiping about $165 billion (around Rs. 11.9 lakh crores) off its market value.

It benefited in the third quarter from a CNY 8.8 billion (approximately Rs. 9,200 crores) net gain on its investment activities, including fair value gains from the initial public offering of online food delivery to ticketing services firm Meituan Dianping.

Smartphone games revenues grew 7 percent year-on-year and 11 percent quarter-on-quarter to CNY 19.5 billion (roughly Rs. 20,300 crores), mainly due to contributions from new games. But PC games revenue dropped 15 percent year-on-year, worse than analysts expected, which the company attributed in part to users shifting to mobile.

Advertising revenue, accounting for a fifth of the company's total revenue, rose by 47 percent to CNY 16 billion (roughly Rs. 16,600 crores), supported by a 61 percent jump in social and other advertising.

New games frozen
Tencent is yet to receive approval in China to charge for its popular survival-themed battle game PUBG Mobile, which some estimates say could bring in up to $1 billion (roughly Rs. 7,200 crores) a year.

Despite the freeze on new games in China, Tencent said it released 10 titles in the quarter, including through "persuading" small studios with approved games to let Tencent publish them, chief strategy officer James Mitchell said.

It said that in overseas markets PUBG Mobile has become the second most popular smartphone globally (excluding China) as ranked by monthly active users, while Mitchell said Tencent was also seeing more first-time female gamers.

Tencent has expanded its self-imposed playtime restrictions for underage gamers to create a "healthy gaming environment for children", in-line with government initiatives.

Mitchell said minors' revenue contribution was "insignificant" and that the measures are not expected to have a major impact on spending by adults.

Growth search
Tencent announced a major restructuring in September aimed at expanding into cloud and industrial services in areas including fintech, healthcare and transportation.

Payment and cloud services helped its "other" revenue category rise 69 percent to CNY 20.3 billion (roughly Rs. 21,100 crores) in the quarter, while cloud services revenues more than doubled and the number of paying cloud customers grew and cloud revenues for the first three quarters exceeded 6 billion yuan.

Lau said a newly-integrated advertising and marketing unit would help Tencent serve advertising clients better and improve the segment's growth, but said it does not want to "hurry" into overloading users with too many advertisements.

Trade tensions with the United States and regulations in China forced Chinese search engine Baidu to warn last month that its advertising revenue would take a hit.

"We believe given our superior performance we should continue to outperform the industry given the return on investment we deliver to our advertisers," Mitchell said.

© Thomson Reuters 2018