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Sherman So

Despite profit surge, concerns are raised over key business

Growth at Tencent Holdings, which more than doubled its profits last year, is showing signs of slowing down.

Shenzhen-based Tencent, the mainland's largest internet firm by market capitalisation, operates the country's most popular instant messaging service QQ.  The basic service is free, with the company pulling in revenue from selling online to its teenage users virtual items such as 'pets' and icons representing a user's identity.

The popular platform also allows Tencent  chairman   Pony Ma Huateng  to branch into other online businesses, such as games, auctions and payment services.

Profit last year surged to 1.06 billion yuan from 485.4 million yuan, in line with a jump in revenue to 2.8 billion yuan from 1.4 billion yuan.

However, the company's latest financial report shows its growth engine is slowing down. Revenue from Tencent's internet value-added services  - virtual items and online games  accounting for 61.2 per cent of total revenue - dropped 10.9 per cent from the previous quarter.

The company said a key factor in the decline was its efforts to increase the security of the platform.

Tencent implemented measures that make it more difficult for users to buy virtual items or send them to others as gifts.  The measures were necessary to combat a rise in the theft of such items, Tencent president Martin Lau  said.

The company's actions on this front raised speculation that  the security measures were brought in  to address government and  community concerns  over the QQ platform being used for gambling and the QQ coins being used as virtual currency.

'There are online games that allow users to play against each other and win or lose some virtual coins in the process,' said Sidney Song,  an analyst at Beijing-based market researcher Analysys.

'These games also provide a way for users to exchange their virtual coins back to cash by deliberately losing to their opponents.'

Discounted QQ coins are auctioned on Taobao, the country's largest online auction market.

'There has been a heated debate on whether virtual currencies, such as QQ coins, would have an impact on  the yuan because they are used as  a means of exchange by people,' Mr Song said. 'Although at their present scale they are unlikely to cause real problems, the potential risks are alarming. For example, would the inflow of virtual currency cause inflation?'

The  media has been debating both issues.  Last month, four ministries - covering the police, culture, information industry and news and publishing - issued directives to control online games rules and ban online gambling.

The directives said  operators could not provide games that allowed users to play against each other for virtual currencies.  They  also state online game operators cannot take commissions  and must prevent users from trading their virtual items  or transferring virtual currency back to cash or for real products.

'Our games do not allow users to play against each other for QQ coins,' said Mr Lau. 'They play to win some sort of virtual prizes only.'

Mr Lau said QQ coins could never become a real currency. 'We don't allow users to transfer QQ coins  between themselves. We don't redeem QQ coins back to  yuan and our cost for issuing QQ coins is high. For every dollar of QQ coins we sell, 30 cents is paid to our distribution channel,' he said.

Of all Tencent's operations in the fourth quarter, the online games business took the biggest hit.  Revenue dropped 16.8 per cent from the previous three-month period.

The company said mini casual games were  hurt by security measures  relating to accounts, and a system upgrade also caused disruption to collecting money from the business.

The structure of mini casual games leaves this part of the business the most likely to attract gambling and the use of QQ coins as a virtual currency. These issues may haunt Tencent for some time.  Mr Lau expects the company's security measures to continue  despite their negative financial impact.

Morgan Stanley executive director Richard Ji  lowered his earnings growth estimate for Tencent for  this year by  seven percentage points to 13 per cent after the results announcement.  However, he maintained an overweight rating on the stock.



Slump in online games casts shadow on Tencent's success