Tencent Surges as Profit Beats Estimates on Mobile Games

Tencent Holdings Ltd. (700), Asia’s largest Internet company, surged in Hong Kong trading after first-quarter profit rose 60 percent because of online game sales and advertising revenue from its WeChat and QQ messaging services.

The Shenzhen-based company rose 5.8 percent, the most in a month, to HK$108.80 as stockholders approved a 5-for-1 share split. Net income jumped to 6.46 billion yuan ($1.04 billion) in the three months ended March, helped by one-time gains, beating the 4.86 billion-yuan average of nine analysts’ estimates compiled by Bloomberg.

Tencent is adding services to apps including WeChat, known as Weixin in China, as it competes with Alibaba Group Holding Ltd. and Baidu Inc. (BIDU) Tencent is counting on messaging, e-commerce and games like Blade & Soul and Candy Crush Saga to win a bigger slice of China’s 618 million Internet users as they migrate toward content on their smartphones and tablet computers.

“Tencent has a great advantage in promoting and distributing its mobile games because it has platforms like WeChat that have a huge user base,” Li Yujie, an analyst at RHB Research Institute Sdn. in Hong Kong, said by phone today.

Non-GAAP profit rose 29 percent to 5.19 billion yuan and provided a better picture of the quarter’s performance, President Martin Lau said on a conference call yesterday.

Photographer: Brent Lewin/Bloomberg

Tencent added games and advertising services to messaging applications including WeChat, known as Weixin in China, as it competes with Alibaba Group Holding Ltd. and Baidu Inc. Close

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Photographer: Brent Lewin/Bloomberg

Tencent added games and advertising services to messaging applications including WeChat, known as Weixin in China, as it competes with Alibaba Group Holding Ltd. and Baidu Inc.

Apple, Android

“In terms of monetization around Weixin platform and mobile QQ platform, the successful launch of mobile games is actually a big achievement,” Lau said. “We’ve proved that a good mobile platform that provides a lot of user interaction, that captures a lot of usage, will have a lot of monetization potential.”

Revenue rose 36 percent from a year earlier to 18.4 billion yuan, the company reported yesterday. Online game revenue increased to 10.4 billion yuan, and online advertising revenue rose 38 percent to 1.17 billion yuan.

Mobile-phone game revenue tripled from the previous quarter to 1.8 billion yuan, according to the filing.

Tencent has introduced 18 games for Google Inc. (GOOG)’s Android operating system and 16 games for Apple Inc. (AAPL)’s iOS, including GunZ Dash, Piyush Mubayi, an analyst at Goldman Sachs Group Inc. (GS) in Hong Kong, wrote in a May 9 report.

‘Mid-Core Games’

“We see the potential to add more mid-core games and also over time to start introducing some of the harder core titles that are popular in Korea and Japan,” James Mitchell, chief strategy officer at Tencent, said on the call.

Mid-core games refer to titles that attract users to play for a longer duration of time and spend more money, Mitchell said.

The company’s open platform shared 5 billion yuan in revenue with developers, Dowson Tong, president of the social network group, said at a conference in Beijing on May 10.

Tencent’s social-network business that includes products like QZone, a platform that allows users to write blogs and upload photos, helped generate revenue of 4 billion yuan. Qzone’s mobile-device monthly active users reached 467 million in the first quarter.

“The vision for us around the two social mobile platforms is to connect people with various things,” Lau said, referring to QQ and WeChat. He added the connections included people, content and offline services.

WeChat, QQ

The company’s stockholders approved a proposal to split each share into five as the company tries to boost holdings by individuals. The Hong Kong market requires investors to buy shares in multiples of 100.

The company also recorded one-time gains through a transfer of its e-commerce businesses to JD.com and its sale of shares in ChinaVision Media Group Ltd.

QQ, which had about 848 million monthly active users at the end of March, caters to people looking for entertainment content, usually in second- and third-tier cities. WeChat, which has about 396 million monthly active users, is geared toward white-collar consumers.

“The results were strong as income from mobile games on QQ and WeChat grew faster than we expected,” said You Na, an analyst at ICBC International Research Ltd. in Hong Kong. “People initially were only upbeat about WeChat and worried that QQ’s growth would slow down, but the latest mobile active users show that QQ remains strong.”

Alibaba, Facebook

Competition among Internet companies is intensifying as Alibaba filed for what may be the largest initial public offering in the U.S. on May 6. Chinese Internet companies led by Alibaba and Tencent have announced 61 acquisitions and investments with a value of $24.5 billion since 2012, according to data compiled by Bloomberg.

Tencent said May 6 it will buy a stake in digital mapping provider NavInfo Co. for 1.17 billion yuan.

Recent deals have highlighted the potential value of WeChat. In February, Facebook Inc. (FB) agreed to pay as much as $19 billion for rival message service WhatsApp Inc. The same month Rakuten Inc. agreed to buy message and calling app Viber for $900 million.

Tencent’s marketing expenses jumped 93 percent to 1.9 billion yuan in the first quarter, partly due to subsidies to encourage adoption of Weixin Payment while using the affiliate cab booking app Didi Taxi, Chief Financial Officer John Lo said.

Weixin Payment’s user growth is mainly coming from mobile game purchases, e-commerce transactions and Didi Taxi, said Lau.

Didi Taxi plans to hold an initial public offering in three to five years, preferably in the U.S., according to co-founder Zhang Bo.

WeChat may be worth as much as $64 billion, given the potential for the service to be monetized, Elinor Leung, an analyst at CLSA Ltd., wrote in a March 10 report.

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

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

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