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Tencent Falls as Profit Misses Estimates: Hong Kong Mover

Tencent Holdings Ltd. (700) fell the most in 13 months in Hong Kong trading after China’s biggest Internet company posted profit that missed analyst estimates and said a slowing economy is paring advertising growth.

The games and social networks operator fell 7 percent to close at HK$249.20, its biggest decline since Oct. 3, 2011. Net income climbed to 3.22 billion yuan ($517 million) in the third quarter from 2.45 billion yuan a year earlier, Tencent said in a statement yesterday. That fell short of the 3.33 billion-yuan average of eight analysts’ estimates compiled by Bloomberg.

The decelerating economy in China “may slow revenue growth rates for the online advertising industry as a whole,” including Tencent’s own business, the company said yesterday. Chief Executive Officer Pony Ma has sought to reduce the company’s reliance on online games by adding users to Tencent’s social-networking sites including Qzone and Pengyou.

“Games continue to be the driver, which everyone expected, but online advertising is the disappointment,” said Billy Leung, an analyst at OSK Securities Hong Kong Ltd. “The results aren’t that bad because the user-base growth is still healthy.”

Sales rose 54 percent to 11.6 billion yuan, matching the average estimate of 12 analysts. The stock has gained 60 percent this year, outpacing the 15 percent advance in the city’s benchmark Hang Seng Index.

Profit Drivers

“I’m not sure the stock can go a whole lot higher unless the company can show it is not only doing well in games, but also developing substantial new profit drivers in other areas,” said Justin Weiss, an analyst at JI Asia in Tokyo. “It’s not just about the games business staying strong, but about a larger bottom-line impact from other areas, such as advertising and smartphone-based services.”

Internet advertising revenue increased to 1.02 billion yuan in the third quarter, the Shenzhen-based company said. Ad revenue gained 69 percent year-on-year, with growth from the previous quarter slowing to 15 percent, Tencent said.

“Our growth will be a function of the industry’s broader growth” for ad sales, Chief Strategy Officer James Mitchell said on a conference call yesterday. “The industry’s broader growth is choppier now than it was 12 months ago and could remain choppy for some time.”

Internet Rivals

Baidu Inc. (BIDU), owner of China’s most-used search engine, on Oct. 29 forecast the slowest quarterly sales growth in three years, citing the weaker economy as deterring online advertising spending. Revenue will range from 6.16 billion yuan to 6.35 billion yuan in the fourth quarter, Beijing-based Baidu said at the time. The top end of the forecast range represents year-on-year sales growth of 42 percent, the slowest pace since the fourth quarter of 2009.

NetEase Inc. (NTES), the operator of China’s second-largest online games website, yesterday also reported third quarter profit that missed analysts’ estimates. Net income of $129.2 million fell short of the $148.7 million average of nine analysts’ estimates compiled by Bloomberg.

Sina Corp. (SINA), operator of the Twitter-like Weibo microblog, is scheduled to report financial results later today.

Tencent’s revenue from Internet services including online games rose to 8.37 billion yuan in the quarter, a 39 percent increase from a year earlier. Tencent licenses the games “Dungeon & Fighter” and “Cross Fire” from Nexon Co. (3659) It also has self-developed titles including “Legend of Yulong.”

The company had 784 million monthly active user accounts for its QQ instant messaging service at the end of September, a 10 percent gain from a year earlier. Tencent had 507 million registered users for its microblog service, it said.

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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