Tencent Slides on Concern China’s Slowdown Will Hit Ads

Tencent Reports Record 1Q Earnings
  • Company says uncertainty may cause near-term challenges
  • Viewership of NBA games rose, attracting large advertisers

Tencent Holdings Ltd. fell the most in three months after Asia’s biggest instant message company said uncertainty about China’s economy could cause near-term challenges for its booming advertising business.

The stock fell 2.4 percent to HK$157.20 in Hong Kong. Advertising was the star performer in the company’s record earnings reported Wednesday, with online revenue surging 73 percent.

Adding streaming content such as Game of Thrones and National Basketball Association games has helped attract big-budget advertisers to Tencent and boosted growth, which could be affected by any pullback in marketing by companies. China’s economy is growing at the slowest pace in 25 years and is transitioning from one built on exports to instead be anchored by consumer spending

“Investors are worried that the advertising business is maturing and hence has less potential to diversify revenue channels,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Services LLP. “Also the advertisement unit will inevitably be affected by the macro economy.”

Tencent’s net income climbed 33 percent to 9.18 billion yuan ($1.4 billion) in the March quarter, topping the 8.71 billion-yuan average of estimates compiled by Bloomberg. Sales also beat expectations.

“Our brand advertising business could face near-term challenges due to the uncertainties of macroeconomic environment in China,” Tencent said in its earnings release.

Revenue from the Value Added Services unit, which includes online games and messaging, rose 34 percent to 25 billion yuan. Adding titles such as Wind Saga and Kungfu Frontier not only helps make money from existing users, it attracts even more customers to the platforms.

Mobile gaming revenue rose 16 percent from the December quarter to 8.2 billion yuan, the company said. Tencent is buying up the rights for anime, comics and novels to convert them into content and boost its slice of a China mobile gaming market expected to reach 68.8 billion yuan by 2018.

WeChat had 762.4 million monthly active users and the mobile version of QQ had 658 million users at the end of the quarter. Adding online payments and facilitating e-commerce are part of Chairman Ma Huateng’s efforts to make money from China’s 688 million Internet users.

To strengthen its dominance in instant messaging, it created a service called Enterprise Weixin for the office that enables chat and company notices.

While Tencent is increasing advertising on the Weixin Moments social network function to add revenue, it’s trying to minimize the disruption to users and reduce the risk of turning them off the platform.

“The market may be over-concerned about the weak guidance on branded ads,” analysts at China International capital Corp. led by Haofei Chen said in a report. “We think it’s better to lower market expectation than let it down,” they wrote, maintaining their buy rating and citing a deteriorating economy as a key risk.

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