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Weak Tencent results point to potential China contraction on virus spread

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Tencent's lacklustre results has reinforced concern about the extent to which the Covid-19 pandemic will hurt its home market.

TENCENT Holdings Ltd delivered disappointing earnings and warned about a difficult advertising environment in 2020, voicing caution about how a potential Chinese economic contraction might affect its sprawling businesses.

China's largest gaming and social media company reported lower than anticipated net income of 21.6 billion yuan (S$4.4 billion) in the December quarter. Overall costs swelled 20 per cent, underscoring how Tencent is spending to acquire content and snag new users to fend off hard-charging rival ByteDance Inc.

Tencent's lacklustre results reinforced concern about the extent to which the Covid-19 pandemic will hurt its home market, following Alibaba Group Holding Ltd's warning that the coronavirus will deal a broad-based blow to the Chinese economy. Beijing released data on Monday which suggests the world's No 2 economy may contract this quarter for the first time since 1989, denting the consumer and marketing spending that Tencent relies on for revenue growth.

The "ads business is going through difficult times due to challenging macro conditions and competition", said John Choi, head of China Internet research at Daiwa Capital Markets Hong Kong Ltd. "At this moment, it is hard to predict whether the strong momentum from the game business is going to offset the others."

Shares in Prosus NV, the entity controlled by Naspers Ltd which serves as a proxy for Tencent, dived more than 7 per cent in Amsterdam.

Online gaming revenue grew 25 per cent - the fastest growth of that business Tencent has managed since the first quarter of 2018. Smartphone game sales increased 37 per cent in the quarter. The company then picked up millions of new gamers during the coronavirus pandemic, which erupted from Wuhan in January. Yet it is uncertain if those players will stay, and less so if they will spend. In-game purchases for marquee titles like Honor of Kings dwindled in recent weeks after China began to go back to work.

The topline "is driven by stronger growth in the online games segment, which bodes well as the company navigates virus headwind in the coming quarter", Bloomberg Intelligence analyst Vey-Sern Ling said.

On Wednesday, Tencent said the outbreak was holding back its fast-growing cloud computing business by forcing clients to postpone spending. Convincing carmakers, luxury goods purveyors and other industries to buy ads would also be particularly challenging in 2020, chief strategy officer James Mitchell warned. The coronavirus outbreak also hit its online payments business WeChat Pay after forcing the closure of stores, restaurants and other brick-and-mortar merchants across the country.

"While it's a difficult environment overall for advertising in China, we believe we're well positioned to continue growing," Mr Mitchell told reporters.

Tencent is also wrestling with industry-specific issues. It must count on ageing cash cows Honor of Kings and Peacekeeper Elite to sustain its pace of growth while it awaits Chinese government approval - a process that has become much stricter and slower - for the commercial launch of potential smash hits such as Call of Duty Mobile domestically.

This week, the company finally kicked off sales of two popular Mario games for the Nintendo Switch console in China after getting the green light. Tencent is also testing a Twitter-style video and content feed on its ubiquitous WeChat app to win back users from ByteDance.

"Tencent's fight against gravity will continue until it gets positive signals from China's gaming regulators," said Michael Norris, Shanghai-based analyst with AgencyChina. "Mobile titles like Dungeon & Fighter, League of Legends and Call of Duty Mobile could be a big boon for Tencent in 2020." BLOOMBERG