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Tencent Net Income Misses Estimates on WeChat Marketing

Tencent Holdings Ltd. (700), China’s largest Internet company by market value, posted profit that missed analyst estimates as it boosted spending on e-commerce and marketing to compete against Alibaba Group Holding Ltd.

Net income rose 19 percent to 3.68 billion yuan ($601 million) from 3.1 billion yuan a year earlier, the Shenzhen-based company said in a statement. That missed the 3.9 billion-yuan average of six analysts’ estimates compiled by Bloomberg. The stock fell as much as 5 percent.

Tencent has added games and other new services to its WeChat instant messaging service, which has more than 300 million users, as it tries to commercialize the app without charging for access. The company hired soccer superstar Lionel Messi to promote the app as it counts on its popularity to compete against Alibaba, China’s biggest e-commerce company.

“Tencent has invited a lot of celebrities to promote WeChat overseas, that has driven up costs,” said Ricky Lai, an analyst at Guotai Junan International Holdings Ltd. in Hong Kong by phone. “Intensified competition in online gaming and the low margin from e-commerce also dragged down its operating margin.”

Tencent shares fell 1.3 percent to HK$365.20 as of 10:09 a.m. in Hong Kong, paring this year’s gain to 47 percent. The benchmark Hang Seng index is little changed in 2013.

Photographer: Tomohiro Ohsumi/Bloomberg

Tencent Holdings Ltd.'s WeChat app, known as Weixin in China, is projected to have at least 400 million users by the end of this year, Alicia Yap, an analyst at Barclays Plc in Hong Kong, wrote in a report. Close

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Photographer: Tomohiro Ohsumi/Bloomberg

Tencent Holdings Ltd.'s WeChat app, known as Weixin in China, is projected to have at least 400 million users by the end of this year, Alicia Yap, an analyst at Barclays Plc in Hong Kong, wrote in a report.

Group revenue rose 37 percent to 14.4 billion yuan from a year earlier.

Advertising Revenue

Online advertising revenue climbed 53 percent from the previous quarter to 1.3 billion yuan, while e-commerce gained 15 percent to 2.2 billion yuan. The cost of revenue, which reflects merchandise sold and content, rose 11 percent, it said.

Selling and marketing expenses in the June quarter rose 28 percent from the three months ended March to 1.2 billion yuan as the company boosted activities in international markets and targeted customers in the U.S., Hong Kong and Taiwan.

“It’s a longer term investment for them, they really need to step up the WeChat investment,” John Choi, an analyst at Daiwa Securities Group Inc. in Hong Kong, said by phone. “It’s an inevitable cost that they have to take right now.”

Competition between Internet companies is intensifying after Alibaba bought an 18 percent stake in Sina Corp. (SINA)’s Weibo, a microblogging service that had more than 54 million daily active users between March and June. Alibaba suspended sellers’ access to WeChat applications this month, while allowing Sina Weibo users to access its website.

Photographer: Lam Yik Fei/Bloomberg

Soft toys promoting QQ.com, operated by Tencent Holdings Ltd., are seen displayed at a news conference in Hong Kong. Tencent’s flagship QQ instant-message service had 819 million monthly active users as of June 30, compared with 784 million a year earlier. Close

Soft toys promoting QQ.com, operated by Tencent Holdings Ltd., are seen displayed at a... Read More

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Photographer: Lam Yik Fei/Bloomberg

Soft toys promoting QQ.com, operated by Tencent Holdings Ltd., are seen displayed at a news conference in Hong Kong. Tencent’s flagship QQ instant-message service had 819 million monthly active users as of June 30, compared with 784 million a year earlier.

‘Land-Grab Situation’

“At this point of time, smartphone-based communication products are in quite a bit of land-grab situation,” President Martin Lau said on a conference call. “This means if you don’t spend within a year, you probably are not going to be able to capture market share.”

More than 84 percent of China’s Internet users regularly access instant messaging, making it the most popular online application in the country, followed by search engines with about 80 percent usage, according to data compiled by Bloomberg.

Tencent is investing the most since 2009 on research and development, building games and other mobile applications to lure customers who are spending more time on their smartphones and tablets.

Active users of WeChat rose to 235.8 million in the June quarter, almost triple the 85.2 million of a year earlier, the company said. Outside mainland China, registered users crossed the 100 million mark, with the main markets for the service including India, Malaysia, Indonesia and Singapore, Lau said.

Phone Carriers

WeChat, known as Weixin in China, is projected to have at least 400 million users by the end of this year, Alicia Yap, an analyst at Barclays Plc in Hong Kong, wrote in a report. If WeChat provides games and related services, it could generate annual revenue of as much as 2.16 billion yuan, Yap wrote.

Billionaire Chairman and Chief Executive Officer Ma Huateng said in May that Tencent found “preliminary” solutions for state-owned carriers concerned that WeChat is eating into their profits.

WeChat poses a challenge for operators including China Mobile Ltd. (941), where revenue for text messaging, its most profitable business, fell 4.8 percent to 44.2 billion yuan last year.

Tencent’s flagship QQ instant-message service had 819 million monthly active users as of June 30, compared with 784 million a year earlier.

The number of monthly active users that accessed QQ from smartphones rose more than 200 percent to 478 million.

To contact the reporter on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

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

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