China’s Tencent reports higher than expected second quarter profit on smartphone games revenue

Chinese internet juggernaut Tencent reported a higher-than-expected 47 per cent jump in net profit for its second quarter on the back of strong revenue growth in smartphone games.

The company’s net profit of 10.88 billion yuan surpassed analyst expectations. Analysts polled by Reuters expected the company to report a 34 per cent increase in net profit to 9.81 billion yuan (US$1.48 billion) for the second quarter ended June 30.

Shenzhen-based Tencent’s revenue rose 52 per cent year on year to reach 35.7 billion yuan, with smartphone game revenues growing 114 per cent year on year to 9.6 billion yuan for the period.

The company’s shares fell 1.23 per cent to close at HK$193 in Hong Kong on Wednesday, ahead of the results release. Tencent’s shares have gained 29.5 per cent since the beginning of this year.

In a conference call with analysts, Tencent’s chief strategy officer James Mitchell said the gaming giant will continue to focus on expanding its mobile games portfolio, including those associated with “existing PC or comic book intellectual property”.

He also suggested that Tencent could be looking into mobile games that utilise location-based services (LBS) technology, following US developer Niantic’s success with Pokemon Go, a smartphone game that allows users to catch and battle “pocket monsters” based on their location.

“We’ve been intrigued for some time by the opportunity that surrounds injecting LBS into smartphone games,” Mitchell said.

“Whether the China audience is as receptive to [games with LBS technology] as other audiences have been, remains to be seen.”

The company’s online advertising revenues grew 60 per cent to 6.5 billion yuan compared with the same period last year, thanks to performance-based advertising revenues from Tencent’s mobile news app Weixin Moments as well as Weixin Official Accounts.

Tencent chairman and chief executive Ma Huateng previously warned in May that Tencent’s brand advertising business could face “near-term challenges” due to the economic slowdown in China, while Tencent president Martin Lau said negotiations for some advertising contracts were taking longer as advertisers budgeted more cautiously.

Tencent, which runs China’s most popular social media platforms WeChat and QQ, said mobile platforms accounted for about 80 per cent of its revenue. Its monthly active users for mobile messaging app WeChat hit 806 million, representing a 34 per cent growth compared to the same period in 2015.

“During the second quarter, we sustained solid growth in our platforms and businesses, including our social and media platforms, games, digital content, advertising and payment services,” Ma said in a prepared statement.

He added that Tencent invested in Finnish mobile game developer Supercell, the maker of popular titles Clash of Clans and Clash Royale, to expand its presence in the global game industry. Tencent and its partners in June agreed to buy an 84.3 per cent stake in Supercell for US$8.6 billion, a deal that analysts said would propel Tencent to become a global entertainment business.

In July, Tencent announced it would merge its music-streaming business with market-leader China Music Corporation as it sought to become a dominant player in China’s digital music industry.