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Tencent finally gives its battle-weary investors some relief

Tencent Holdings surged as much as 4.6 per cent after a resurgent advertising business and whopping one-time gains boosted earnings and bought it time to find an answer for its plateauing core gaming business.

[HONG KONG] Tencent Holdings surged as much as 4.6 per cent after a resurgent advertising business and whopping one-time gains boosted earnings and bought it time to find an answer for its plateauing core gaming business.

The WeChat-operator reported a 30 per cent jump in quarterly profit - well ahead of expectations for about 2 per cent - thanks in part to investments such as recent market debutante Meituan Dianping. That helped its stock rise the most in about two weeks. But revenue grew at its slowest pace in three years, as a Chinese clampdown on gaming licenses continued to hammer its bread-and-butter division.

The government has effectively frozen new game approvals, which means Tencent's been unable to make money off global hits Fortnite and PlayerUnknown's Battlegrounds. That's seen the stock - the biggest member of the MSCI Asia Pacific Index - shed more than US$230 billion of market value since a January peak. While China is trying to combat gaming addiction and is reshuffling regulators, uncertainty persists with Tencent counting on its WeChat social network, advertising and belt-tightening to tide it over.

"People are just relieved that they didn't perform even worse," said Li Yujie, an analyst at RHB Research Institute in Hong Kong. "But the shares might not hold up for the full day, because if you look beyond the headline figures, you can see its gaming business is under stress."

Tencent's earnings also bucked a recent trend of disappointing results from China's technology companies as a slowdown in the economy dampens the outlook. Alibaba Group Holding Ltd. cut its outlook for annual revenue, while search leader Baidu Inc also predicted sales below estimates.

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President Martin Lau offered little insight on the gaming-approval situation on Wednesday's earnings call, saying "there's not a lot of update" on that front. And chief strategy officer James Mitchell told analysts that a worsening macroeconomic environment would hurt advertising in particular, but said the company was confident of outperforming its peers.

The social media titan posted a 30 per cent surge in net income to 23.3 billion yuan (s$4.62 billion) for the September quarter. But that was after it recorded a windfall of 8.8 billion yuan from one-time gains.

"Advertising growth helped the company in revenue this quarter," said Benjamin Wu, a Shanghai-based analyst at Pacific Epoch. "Its gaming business wasn't great, the PC gaming revenue is dropping when the third quarter is supposed to be a strong season, that spells trouble for the full year."

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.

The company is also a key backer of Meituan, a food delivery and local services giant that held its initial public offering in September and provides another avenue to reach consumers.

That sheer reach is helping power its marketing machine. Online advertising jumped 47 per cent in the third quarter. In terms of its smaller but fast-growing divisions, cloud revenue more than doubled in the quarter, while daily mobile payment transaction volumes rose more than 50 per cent.

The gaming business however still yields the biggest chunk of its revenue, though that proportion's dropped steadily as Tencent leverages WeChat.

The Value Added Services division, which includes games, grew just 5 per cent. Drilling deeper, revenue from smartphone games climbed just 7 per cent, while sales from PC titles dropped 15 per cent. In the meantime, Tencent's keeping its pipeline stocked with games developed by external studios that had already secured commercialization approval, Mitchell said.

"Tencent's growth in 3Q smartphone game sales could reverse because of China's uncertain regulatory environment and typically negative 4Q seasonality," said Vey-Sern Ling and Tiffany Tam, analysts with Bloomberg Intelligence. "The 11 per cent sequential gain was driven by positive seasonality and new titles that received monetization approvals prior to a regulatory freeze."


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