Tencent Climbs After Mobile Games, Ad Sales Beat Estimates

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

Tencent Holdings Ltd. climbed to its highest in almost nine months as investment in social networking and games helped Asia’s biggest Internet company post a better-than-expected 45 percent jump in quarterly sales.

Tencent is building its content to draw users to its latest smartphone games, while driving the growth of ads on social networks. 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. Shares rose 3.7 percent to close at HK$157.90 in Hong Kong, the highest since June 26.

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 inventory, trying to keep mobile users engaged without flooding them with ads.

“Tencent has the widest log-in user coverage in China and a large amount of under-monetised premium ad inventory – two unique advantages that enable it to gain a substantial share of digital ad budgets,” John Choi and Alex Liu, analysts at Daiwa Capital Markets, wrote in a research note.

Mobile Record

On Thursday, it reported a net income of 7.16 billion yuan ($1.1 billion) in the three months ended December. While profit was below expectations after Tencent boosted spending, sales climbed to 30.4 billion yuan, beating analyst estimates for 27.8 billion yuan. Record mobile gaming revenue of 7.1 billion yuan and a doubling in online advertising helped drive that revenue surge.

“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.” 

Tencent is also investing in on-demand services such as food delivery, areas that form the battleground with Alibaba Group Holding Ltd. and Baidu Inc. Cost of revenue increased by 52 percent in the quarter, outpacing the 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.”

QQ, WeChat

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.

WeChat had 697 million monthly active users and the mobile version of QQ had 641.5 million users at the end of the quarter. Of the total, more than 20 million were official WeChat accounts set up by businesses or organizations to send promotions and interact with customers. Weixin Pay itself has attracted more than 300 million card binds to its platform, according to Lau.

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