Tencent’s profit climbs as WeChat lures ads, paying gamers

Bloomberg

Tencent Holdings Ltd. posted a 43 percent rise in third-quarter profit that only just missed expectations, as its consistent ability to attract Chinese gamers and social media mavens fueled advertising growth despite growing competition.
Net income climbed to 10.6 billion yuan ($1.5 billion) in the three months ended September, the Shenzhen-based company said Wednesday. That compares with the 10.7 billion-yuan average of analysts’ estimates compiled by Bloomberg.
Tencent’s bottom line depends on effectively engaging a Chinese internet population now 710 million strong, and advertising has become a major source of sales growth as it lures brands onto its WeChat and QQ messaging services. Tencent’s also been scooping up video content and fleshing out its mobile games slate, adding hits while acquiring Clash of Clans studio Supercell Oy. Revenue from smartphone games surged 87 percent to 9.9 billion yuan in the quarter, driven by non-casual titles such as Honour of Kings.
“Mobile game revenue was stronger than the street expected,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Services LLP. “Previously, people were concerned that overall growth in this sector would be slowing.”
Sales rose 52 percent to 40.4
billion yuan, compared with estimates for 39 billion yuan. Revenue from the value-added services unit, which includes online games and messaging, rose 36 percent to 28 billion yuan. And online advertising sales increased by 51 percent to 7.4 billion yuan.
WeChat had 846 million monthly active users — more than twice Twitter Inc.’s, for context — and the mobile version of QQ had 647 million users at the end of the quarter.
Tencent has helped brands including BMW run promotions via WeChat Moments, a service similar to Facebook’s news-feed where users browse photos, videos and
stories posted by friends. It’s also buying the rights to anime, comics and novels to convert into movies and mobile games. But that content acquisition spree — along with an investment in a fledgling cloud computing business — requires a heavy upfront outlay. Overall costs rose 69 percent to 18.6 billion yuan in the three months to September.
“Tencent’s margins were weaker mostly because of its expansion into new business, including payments and cloud,” said Li.
Tencent is said to have budgeted at least $295 million this year and
next to invest in movies in China and Hollywood. It’s sitting atop a plethora of intellectual property for anime and online novels that’re distributed via its websites. The company has aspirations to create a Marvel-like movie empire, as it competes with Alibaba Group Holding Ltd. and Baidu Inc. for viewers.
In the Chinese games market, revenue could climb 43 percent to $12.85 billion by 2020 from last
year, according to PricewaterhouseCoopers LLP. But Tencent has to continually fine-tune its games line-
up to compete with rivals such
as Netease Inc.
“We see brand advertisement enjoying stable growth due to the expansion of Tencent’s video business,” Wen Tianli, an analyst at Blue Lotus Capital Advisors Ltd., wrote before the earnings. “The decline of PC games has been offset by the increasing number of players of mobile games on their summer vacation.”
Tencent recorded adjusted earnings-per-share of 1.24 yuan, compared with the 1.26 yuan average of estimates. Its shares rose 1.9 percent to HK$196.90 in Hong Kong before earnings were announced. The stock has gained 29 percent this year, compared with a 12 percent rise for New York-listed Alibaba.