Tencent results beat estimates as WeChat, games power growth

2017-05-18 08:59 - Bloomberg: Lulu Yilun Chen
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Tencent CEO Pony Ma. (File, AP)

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Hong Kong - Tencent Holdings posted quarterly sales and profit that topped all analyst estimates as blockbuster titles including Honour of Kings drove a billion-plus users on WeChat and QQ to spend on game items.

Revenue climbed to 49.6 billion yuan ($7.2bn) in the three months ended March, the Shenzhen-based company said on Wednesday, surpassing the 46.4 billion yuan analysts projected on average. Net income climbed to a record 14.5 billion yuan, compared with the 13 billion yuan projected.

China’s internet titans are defying a slowdown in the world’s second largest economy. Chairperson Pony Ma is now bolstering a $300bn empire that encompasses everything from online gaming and social media to film and TV production.

Tencent’s adapting a plethora of hit novels and anime into mobile games, distributed via messaging services WeChat and QQ, with an eye toward safeguarding its dominance of domestic media.

"It was a strong set of results," said Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong.

"Tencent’s mobile gaming business was the main contributor, especially Honour of Kings, which is probably generating 2 to 3 billion yuan of revenue a month."

Shares of Tencent inched 0.4% higher before earnings were announced. The stock has gained 37% this year, compared with a 41% rise for New York-listed rival Alibaba Group Holdings. Naspers [JSE:NPN], which owns a significant stake in Tencent, was up 2.2% in early trade in Johannesburg.

WeChat had 937.8 million monthly active users and the mobile version of QQ had 678 million users at the end of the quarter. Revenue from Value Added Services, which includes online games and messaging, soared 41% to 35.1 billion yuan. Of that total, online game revenue grew 34% to 22.8 billion yuan.

Tencent rode a strong showing from Honour of Kings. Developed in-house, the hit title is a mobile battle game in the same vein as the world’s most popular desktop title League of Legends - also owned by Tencent. It topped both revenue and downloads in Apple’s iOS store in March, according to App Annie.

Monthly active users reached 167.7 million in the quarter, Alan Hellawell, an analyst at Deutsche Bank, estimates.

The Chinese company’s pipeline looked full for this quarter as well. It unveiled another 19 mobile titles in April including the much-anticipated JX Online III, according to JPMorgan Chase analyst Alex Yao. A majority of those were adapted from hit novels, shows or anime in hopes of appealing to an established fan base.

"Honour of Kings specifically drove Tencent mobile games in March,"  Hellawell wrote before the earnings. He expects "Tencent to further maintain its leading position in the gaming sector in the long run."

While Tencent remains largely reliant on in-game spending, it’s been growing an online ad business on the back of China’s largest pool of social media users. Revenue from that business increased 47% to 6.9 billion yuan in the first quarter.

The company’s also delving deeper into entertainment, backing Twitch-like streaming sites including Wuhan Douyu Network Technology and accelerating a foray into Hollywood films, helping finance the upcoming summer tent-pole Wonder Woman.

From January, WeChat’s "mini programs" began letting users access third-party services such as bike-sharing without the need to download full versions of individual apps. While nascent, that platform has the potential to side-step Apple or Android app stores and signals Tencent’s longer-term ambition to keep users within its own mobile environment.

WeChat could eventually integrate mini-programs into a fuller-fledged app store that sits on top of native operating systems such as iOS or Android, according to Morgan Stanley analyst Grace Chen.

"We see strong ambition from Tencent in building a closed-loop ecosystem on WeChat," Chen said in a March report, adding that the mini programs could help Tencent in app distribution, mobile payments and data-driven user profiling.

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