Tencent Falls as Analysts Cut Share Price Forecasts

Tencent Holdings Ltd (700), China’s largest Internet company, fell in Hong Kong trading after at least seven analysts cut share price forecasts on the stock.

The shares fell 4 percent to HK$252.40 at the close of trading in Hong Kong. The stock was the second-worst performer in the benchmark Hang Seng Index (HSI), which fell 0.1 percent.

Morgan Stanley cut its share price forecast by 1.6 percent to HK$315.70, citing lower profit margins and slowing growth in game sales after Tencent released fourth-quarter earnings that beat analyst estimates yesterday. Goldman Sachs Group Inc., JPMorgan Chase & Co., Piper Jaffray Cos., CIMB Group Holdings Ltd., OSK Securities Hong Kong Ltd. and Bocom International Securities Ltd. also lowered their price targets.

“The operating margins decline due to higher sales and marketing spend was a bit worrying,” Alicia Yap, an analyst at Barclays Plc, said in a report today. The “earnings beat was driven by tax reversal,” she wrote.

Sales and marketing costs rose 34 percent to 1.1 billion yuan ($177 million) in the December quarter compared with the September period.

Billionaire Chairman Pony Ma is trying to expand in e- commerce to compete with Alibaba Group Holding Ltd. as China’s economic growth boosts online spending.

Photographer: Lam Yik Fei/Bloomberg

Tencent Holdings Ltd Chairman Pony Ma pauses during a news conference in Hong Kong. Close

Tencent Holdings Ltd Chairman Pony Ma pauses during a news conference in Hong Kong.

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Photographer: Lam Yik Fei/Bloomberg

Tencent Holdings Ltd Chairman Pony Ma pauses during a news conference in Hong Kong.

Tencent, which gets most of its sales from the business than includes gaming, sees a “huge opportunity” in e-commerce in the next five to ten years, President Martin Lau said at a press conference in Hong Kong yesterday.

WeChat Expansion

Net income grew 37 percent to 3.46 billion yuan, the Hong Kong-listed company reported yesterday. That beat the 3.32 billion yuan average of 11 analyst estimates compiled by Bloomberg. Sales climbed 53 percent to 12.2 billion yuan.

Shenzhen, China-based Tencent is also trying to commercialize the free WeChat instant messaging service to compete with Sina Corp. (SINA)’s Twitter-like application Weibo and cut its dependence on Internet games. Development of the application, which had more than 300 million users by January, comes as marketing spending increases and Internet users shift from using personal computers to mobile devices.

Tencent wants to ensure the “user experience is at front and foremost,” President Martin Lau said. “We are not in rush to make money from Weixin,” he said, referring to WeChat in Chinese.

WeChat has the potential to reach at least 400 million users by the end of 2013 and earn annual revenue of as much as 2.16 billion yuan, Yap wrote in a March 13 report.

WeChat allows users to send text, image or audio messages. The audio message function is similar to an application from WhatsApp Inc.

To contact the reporters on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net; Natasha Khan in Hong Kong at nkhan51@bloomberg.net

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

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