Tencent tops estimates as ads outpace struggling games business

Hong Kong

TENCENT Holdings Ltd's profit beat analyst estimates as strong growth in advertising and content made up for a Chinese gaming business struggling with a government clampdown.

The company reported net income of 23.3 billion yuan (S$4.6 billion) for the September quarter, compared with the 18.4 billion yuan average estimate. Revenue rose 24 per cent to 80.6 billion yuan.

Tencent bucked a trend of recent letdowns, as a slowdown in the world's second-largest economy dampens the outlook for China's largest corporations. Alibaba Group Holding Ltd cut its outlook for annual revenue, while search leader Baidu Inc also predicted sales below estimates.

Tencent's beat stems in part from lowered expectations as the company grapples with a delay in new gaming licences that has helped wipe out more than US$240 billion of market value since a January peak. That meant Tencent has been unable to make money off its newest and biggest titles - including global hits Fortnite and PlayerUnknown's Battlegrounds.

While China is trying to combat gaming addiction and is reshuffling regulators, uncertainty persists for gaming companies. Tencent is said to be responding with belt-tightening as it cuts marketing budgets to help tide it over the drought.

Tencent still commands a powerful asset in WeChat - the ubiquitous messaging service used by more than a billion people to shop, pay for services and hail rides. That's a massive population of longer-term consumers not just for games and ads but also fledgling services from video to financial services.

It is also taking steps to diversify. The company has elevated its cloud computing business to a status on par with gaming and WeChat, and invested billions in startups engaged in everything from ride hailing to e-commerce.

"The huge mismatch between Tencent's mobile traffic dominance and ad dollar market share speaks to its long-term ad monetisation potential," Jefferies analysts led by Karen Chan wrote ahead of the earnings release.

Still, that upbeat assessment came as Jefferies slashed Tencent's earnings estimates "to reflect near-term mobile game growth headwind, a more cautious advertising industry from macro uncertainty and loss of payment-related interest income", its analysts wrote. BLOOMBERG