Tencent Earnings Rise as Ma Invests in Content to Lure Users

  • Asia's biggest Internet company posts 45% jump in sales
  • Battle with Alibaba, Baidu for content is fueling spending

Tencent Holdings Ltd. posted a 22 percent jump in fourth-quarter profit as Asia’s biggest Internet company increased spending on content to draw users to its new smartphone games and drive ads on social networks.

Net income was 7.16 billion yuan ($1.1 billion) in the three months ended December, the Shenzhen-based company said Thursday. While profit was below expectations after Tencent boosted spending on videos, sales climbed to 30.4 billion yuan, beating analyst estimates for 27.8 billion yuan.

Tencent is building its content to attract users while also investing in more on-demand services such as food delivery, areas that form the battleground with Alibaba and Baidu Inc. It’s buying video as well as the rights for anime, comics and novels to convert into mobile games that it promotes through its WeChat and QQ instant message systems.

“The strong revenue growth was driven by much higher than expected mobile game revenue, as well as the advertising revenue. That will make investors positive about the company’s growth potential,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Services LLP. “Their margins exhibited some pressure.” 

Content Partners

Cost of revenue increased by 52 percent in the quarter, outpacing the 45 percent increase in sales, as the company paid more for content, while bank-handling fees for customers’ money transfers reached 300 million yuan a month.

“We’ve been spending money to acquire high quality content,” President Martin Lau told reporters. “We really are focusing on building a healthy ecosystem for third party content providers.”

With more than a billion combined users for WeChat and QQ, Tencent is following in the footsteps of Facebook Inc. by experimenting with new ways to make money from its social networks. Rich content is key as Tencent expands its advertising service and inventory, trying to keep mobile users engaged within its social network and content platforms without flooding them with ads.

Tencent last month announced plans for a 0.1 percent transaction fee on WeChat cash withdrawals, as it tries to recover the cost of supporting the popular service called Weixin Pay. The withdrawal fee applies once a user takes more than 1,000 yuan out of their account. Adding online payments and facilitating e-commerce are part of the company’s efforts to make money from China’s 668 million Internet users.

QQ, WeChat

Shares of Tencent rose 0.9 percent to HK$152.30 in Hong Kong before earnings were announced. The stock is little changed this year compared with about a 10 percent drop for New York-listed Alibaba.

Billionaire co-founder Ma Huateng has identified online health, education and the media content industry as potential areas of growth. In a proposal to China’s National People’s Congress this year, Ma suggested that the government allow doctors to freelance, build online personal medical files, and relax digital content policies to help China’s Internet sector prosper.

Among the projects in its pipeline is a workplace messaging app, Lau said. Services like Slack have taken off as businesses look for alternatives to e-mail to encourage employees to communicate and collaborate. Alibaba has also developed a messaging service for enterprise, called DingTalk.

Fourth-quarter revenue from the Value Added Services unit, which includes online games and messaging, rose 35 percent to 23.1 billion yuan. WeChat had 697 million monthly active users and the mobile version of QQ had 641.5 million users at the end of the quarter.

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