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Tencent's revenue falls short as ByteDance saps ad growth

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Tencent will continue to invest in gaming and video content production, and explore opportunities in enterprise tech, education and healthcare-related startups.

Hong Kong

TENCENT Holdings Ltd's comeback is taking a little longer than expected. The Chinese social media giant's shares tumbled more than 4 per cent after quarterly revenue fell short of analysts' projections.

China's leading gaming company posted disappointing growth after rivals like ByteDance Inc and a broader economic slowdown sapped advertising. Online ad revenue grew a worse-than-expected 16 per cent as the Internet wunderkind undercut Tencent's efforts to load more ads into its WeChat super-app.

The social media giant is trying to bounce back from a horrendous 2018, when a regulatory clampdown walloped its marquee games business. While regulators are again green-lighting games after last year's freeze - including Tencent's breakout hit of 2019, Peacekeeper Elite - they're doing so at a slower pace. The emergence of a formidable competitor in ByteDance, the world's most valuable startup, has also exacerbated the cooling effect on marketing spending of a sputtering Chinese economy.

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"Tencent's advertisement revenue was disappointing, partly due to competition from ByteDance," said Canaan Guo, an analyst at Pacific Epoch. "Even though WeChat increased its ad inventory, it wasn't able to fully sell its ad space because it charges more than rivals." Tencent reported revenue of 88.8 billion yuan (S$17.5 billion), lagging the 93.4 billion yuan average estimate and spurring several analysts to cut price targets on the company. While sales of social media ads and "others" jumped 28 per cent, media ad revenue slid 7 per cent because of unexpected delays in the airing of certain drama series. The stock slid as much as 4.2 per cent, caught up also in a broader Asian market selloff.

"Our assumption is that the macro environment will remain difficult for the rest of the year," chief strategy officer James Mitchell told analysts on a conference call. "The situation of the heavy supply of advertising inventory will continue for the rest of the year, and potentially into the next year," he said, adding that this could affect revenue from the vehicle, real estate and financial services sectors.

Tencent can still accelerate growth, riding Peacekeeper Elite as well as older, durable titles such as Honour of Kings. It released 10 games in the second quarter. To fend off ByteDance, it's adding content and services to WeChat, partnering the likes of Q&A platform Zhihu and funnelling more of its one billion-plus users to mini-programs - lite apps that offer third-party services from ride-hailing and food delivery to bike sharing. WeChat, the ubiquitous messaging service that acts as a gateway to those activities, grew users 7 per cent to 1.1 billion.

"We expect gaming revenue to re-accelerate starting from the second quarter onwards," said David Dai, a Hong Kong-based analyst at Bernstein, adding that this would also drive an acceleration of overall revenue.

Net income rose a better-than-expected 35 per cent to 24.1 billion yuan in the three months ended June, but that was boosted by gains of more than 4 billion yuan partly from the rising valuation of investees. The company is one of China's most prolific tech investors, and in past years has acquired slices of major startups from ride-sharing giant Didi and on-demand services firm Meituan to video site Kuaishou. Hunkering down for tougher times, selling and marketing expenses dived 26 per cent. But Tencent will continue to invest in gaming and video content production, and also get more active in exploring opportunities in enterprise tech, education and healthcare-related startups, Mr Mitchell said.

Some of Tencent's younger divisions came through. The fintech and business services group - a newly formed unit that includes cloud and payments - grew revenue 37 per cent to 22.9 billion yuan. Its Licaitong wealth management platform, which competes with rival Chinese billionaire Jack Ma's Ant Financial, had accumulated 800 billion yuan of customer assets by the end of June. And it's making "strong" inroads into short video, president Martin Lau said, addressing one of ByteDance's fortes. The company will study user behaviour and send targeted mini-videos via Tencent's Weishi product, he added.

The company however still derives the lion's share of its revenue from gaming. Tencent's biggest hit of 2019 - bereft of much of the violence typical of duel-to-the-death titles, to appease regulators - is expected to generate US$1 billion in revenue by the end of the year, according to gaming consultant Niko Partners. Peacekeeper Elite pays tribute to China's air force and Tencent sought out the country's military recruitment arm for advice during development. It's snagged more than 50 million daily active users since the title launched, Tencent said.

The game should have brought in US$49 million of revenue in May and June, or about two thirds of the revenue generated by long-time favourite Honour of Kings, Bernstein's Mr Dai said. He estimates that Tencent's gaming revenue growth could surpass 20 per cent in the third and fourth quarters. BLOOMBERG