Tencent Profit Rises 32% on China Online Advertising, Games

Tencent Holdings Ltd.’s second-quarter profit jumped 32 percent as China’s biggest Internet company drew more advertisers to its social-networking websites and added online-game players.

Net income climbed to 3.1 billion yuan ($487 million) from 2.35 billion yuan a year earlier, Tencent said in a statement to the Hong Kong stock exchange yesterday. That compares with the 3.08 billion-yuan average of nine analysts’ estimates compiled by Bloomberg. Sales rose 56 percent to 10.5 billion yuan.

Tencent added social-networking users to sites including Qzone and Pengyou, helping boost Web advertising sales even as economic growth in China slowed. Chief Executive Officer Pony Ma is increasing spending on e-commerce operations to challenge local industry leader Alibaba Group Holding Ltd. and pare reliance on online games.

“The company has outperformed the rest of the advertising market, and is selling more ads on its online video and social networking sites,” said Dundas Deng, who rates Tencent buy at Guotai Junan Securities in Shenzhen. “The company did well in online games.”

Tencent fell 0.2 percent to HK$230 at the close in Hong Kong trading yesterday, before the earnings announcement. The stock’s 47 percent climb this year is the second-biggest percentage gain on the city’s benchmark Hang Seng Index, which has gained 8.8 percent.

“We achieved strong revenue growth on our social networks during the quarter,” Tencent said.

Game Sales

Online games sales rose 53 percent to 5.57 billion yuan in the second-quarter, Tencent said. Internet advertising revenue increased 72 percent to 880 million yuan, the Shenzhen-based company said.

Last month, Tencent said it will offer Activision Blizzard Inc.’s “Call of Duty” game in China. That’s one of more than 40 titles in Tencent’s games pipeline, according to an Aug. 13 report by Jefferies Group Inc. analyst Cynthia Meng in Hong Kong.

Tencent plans to accelerate the expansion of its online games business overseas, which at present account for a “small” proportion of game revenue, President Martin Lau said.

“It’s an area we will devote more resources to,” Lau said in a conference call with analysts yesterday, without providing details. Overseas game revenue has increase “quite a bit” in the past few quarters, he said.

Tencent’s “League of Legends” game was the most popular title in South Korea with a market share of 21 percent, according to a May 12 report by Barclays Plc’s investment-banking unit.

Cost of Revenue

Cost of revenue rose 85 percent to 4.31 billion yuan, partly because of expenses in its e-commerce business, Tencent said. In May, Tencent said it plans to invest $1 billion in its e-commerce unit to meet rising demand for online shopping in China.

The proposed investment in e-commerce is planned “over a relatively long period of time,” Lau said on the call, without specifying a time frame. Tencent’s spending will be “prudent,” he said.

Tencent had 783.6 million monthly active user accounts for its QQ instant messaging service at the end of June, after adding 31.7 million last quarter. The company had 469 million registered users for its microblog service at the end of June, it said.

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