Tencent Profit Up Despite Weakness from Gaming Unit

Chinese internet giant Tencent Holdings Ltd. posted better-than-expected third quarter earnings results on Wednesday as investment gains and advertising demand offset weakness from its core gaming division.

Tencent’s net income in the July-September quarter climbed 30 percent to CN¥23.3 billion ($3.4 billion), beating analysts’ forecast of CN¥19.32 billion.

Revenue gained 24 percent to CN¥80.6 billion ($11.59 billion), also meeting expectations, although it is the slowest pace in over three years.

Results in the third quarter were supported mainly by one-time gains of more than CN¥8.7 billion, including the initial public offering (IPO) of online food delivery to ticketing services provider Meituan-Dianping in September.

Advertising revenue, which represents 20 percent of the company’s total revenue, also helped Tencent in the third quarter. Online advertising was up 47 percent, driven by a 61 percent growth in social and other advertising.

Earnings of China’s biggest gaming and social media group defied a recent trend of weak results from the country’s tech firms as a slowdown in the economy clouds the outlook.   

Shares of Tencent last stood 0.8 percent lower to HK$272.20 on Wednesday.

Tencent’s stock price, which more than doubled in the previous year, has lost about a third so far this year, erasing around $165 billion in value from the firm’s market value.   

China Crackdown Hits Tencent’s Gaming Business

China, the world’s largest gaming market, has effectively frozen new licenses for games since March and has called to address young people’s gaming addictions.

The move resulted to Tencent’s first quarterly profit decline in over a decade in its April-June quarter and prompted the company to cut its gaming marketing budget.

Tencent already had 15 approvals and released 10 games in the third quarter despite the country’s new approval freeze.

Head of Researcg Asia Douglas Morton stated that the result beat came as a positive surprise even if not counting the investment income.

What the real surprise is or the real comfort for the market will be that the mobile gaming data which beat expectations, Mortain said.

Tencent’s smartphone games sales added 7 percent year-on-year and 11 percent quarter-on-quarter to CN¥19.5 billion, largely because of contributions from new games.

Sales from PC titles, on the other hand, fell 15 percent on a yearly basis due to continued user shift to mobile games and high base in the same quarter last year.

Analysts Vey-Sern Ling and Tiffany Tam stated that Tencent’s growth in third-quarter game sales could reverse because of China’s uncertain regulatory environment and typically negative fourth-quarter seasonality.

The 11 percent sequential gain was driven by positive seasonality and new titles that received monetization approvals prior to a regulatory freeze, they said.

Tencent also saw revenue from its cloud services more than doubled year-on-year in the third quarter, while paying cloud customers grew at a triple-digit percentage rate on a yearly basis. In the first three quarters of the year, cloud revenue has risen above CN¥6 billion.

Monthly active users of WeChat, China’s most popular network, grew steadily to 1.08 billion.That is a huge population of longer-term consumers not just for games and ads but also emerging services from video to financial services.

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