Tencent beats profit expectations with high score from mobile games

The Shenzhen-based company has been on a shopping spree, expanding into different sectors including e-commerce and automobiles

PUBLISHED : Wednesday, 16 May, 2018, 5:55pm
UPDATED : Wednesday, 16 May, 2018, 11:13pm

Tencent Holdings, one of China’s biggest internet companies, pulled a first-quarter surprise on Wednesday, announcing a 61 per cent increase in profits on a strong contribution from its mobile games and online advertising businesses.

China’s largest social network operator and video games company reported net income of 23.29 billion yuan (US$3.65 billion) in the quarter ended March 31, beating average market expectations by about 30 per cent. Revenue reached 73.53 billion yuan, up 48 per cent from the same time last year, driven by online advertising, online games and messaging services. The Hong Kong-listed company reported an operating margin of 42 per cent, up 3 percentage points from the same period a year ago.

Its mobile game business reported a 68 per cent increase in revenue year-on-year to 21.7 billion yuan, driven by its blockbuster title Honour of Kings, which remained the highest-grossing smartphone game in China’s iOS App Store, and a newly-released mobile game version of QQ Speed, which has a strong personal computer (PC) player base. PC games remained flat with 14.1 billion yuan in revenue compared to same period a year ago.

Tencent, however, expects its PC game business to benefit from the roll-out of the desktop versions of popular battle royale titles Fortnite and PlayerUnknown's Battlegrounds, which is currently free to play in China.

Company president Martin Lau Chi-ping said in a conference call with analysts on Wednesday that the multiplayer online game PlayerUnknown's Battlegrounds ”will negatively impact our financials in the short term because we have not yet monetised the games in the China market”. He said the game will likely provide “substantial revenue opportunity once we begin monetisation”.

Last month, Tencent partnered with US developer Epic Games to launch Fortnite in China. The mobile version of Fortnite was an instant hit in the US market after its March launch, becoming the highest-grossing iOS game there.

The results are likely to please Tencent’s army of investors. Lau had warned in March during its 2017 earnings call that this year Tencent would aggressively step up its investments in long – and short – form video content, digital payments, cloud services, artificial intelligence and smart retail, even though it could harm the company’s profitability in the short term.

“We continued investing actively in our strategic priority areas … to fulfil our mission of enhancing quality of life via internet services,” Tencent chairman and chief executive Pony Ma Huateng said during the conference call on Wednesday.

Tencent has been on a shopping spree, expanding into different sectors including e-commerce and automobiles. According to Wednesday’s release, the company flipped to net debt of 14.5 billion yuan as of March 31, compared to net cash of 16.3 billion yuan at the end of 2017, as a direct result of its investments and mergers and acquisitions activity.

Earlier this month, an online essay criticised Tencent’s apparent focus on investments over product innovation, sparking a heated debate in China. The essay, written by veteran tech editor Pan Luan, claimed the company had “lost its dream” by becoming an investment company instead of continuing to develop great products in core areas such as search, e-commerce, information streaming, short video and cloud services.

Has Tencent lost its creative mojo? Essay sparks heated online debate in China

Social and other advertising sales increased 69 per cent year-on-year as a result of more advertisers on WeChat Moments, the social media platform within its hugely popular messaging service. Meanwhile, Tencent’s overall online advertising business achieved 55 per cent year-on-year growth in revenues.

Over the past year Tencent has completed 62 deals involving direct investments and mergers and acquisitions, according to data compiled by Bloomberg. Earlier this month it led a US$820 million round of funding in Shenzhen-based UBTECH Robotics, making it the world’s most valuable AI start-up with an estimated valuation of US$5 billion.

In the video content sector, Tencent poured a total of $1.1 billion into two rivals in a 24-hour period, investing US$632 million and US$461.6 million respectively in Chinese game-streaming platforms Douyu and Huya in March. The following month it led an investment of 617 million yuan in Pear Video, an online short video platform, that counts the listed unit of People’s Daily as a shareholder.

The company is exploring ways to integrate short video into its social network platforms, Tencent’s Ma Huateng said in March during the annual parliamentary meetings in Beijing.

The internet giant has also plunged into the offline retail sector. In January, Tencent partnered with e-commerce companies Suning Commerce Group, and Sunac China Holdings in a 34 billion yuan investment in Wanda Commercial Properties, a Chinese retail operator, forging one of the world’s biggest alliances between the new economy and bricks-and-mortar businesses.

Tencent’s other retail partners include Carrefour, Walmart, Yonghui Superstores, Vipshop Holdings, Bubugao and, who are looking to leverage the internet giant’s capabilities in mobile payments, customer acquisition and cloud services.