Tencent Rises After Online Games, Videos Fuel Record Profit

  • Game revenue surges on new titles, subscription services
  • Online advertising sales double on mobile platform growth

WeChat app.

Photographer: Brent Lewin/Bloomberg

Tencent Holdings Ltd. rose in Hong Kong trading after the Internet company posted record third-quarter profit, withstanding a slowing domestic economy through the popularity of its online games and streaming HBO shows.

Shares gained 0.7 percent HK$151.50 in Hong Kong trading, after earlier rising as much as 2.7 percent. The Shenzhen-based company said Tuesday that net income climbed 32 percent to 7.45 billion yuan ($1.2 billion) in the three months ended September. Sales rose 34 percent to 26.6 billion yuan, beating analyst estimates.

Developing the WeChat and QQ messaging platforms beyond their roots into games and a social network boosted revenue growth and helped founder Ma Huateng reach more than 1 billion users with content including NBA games. That is fueling a push to add new services, show more content like James Bond movies and expand into finance as Tencent battles Alibaba Group Holding Ltd. and Baidu Inc. for China’s 668 million Web users.

“The company is ready to deliver much stronger revenue growth,” saidLi Muzhi, a Hong Kong-based analyst at Arete Research Service LLP. “Advertising services will appeal to more than 600 million users for Tencent, and as they become more sophisticated with WeChat and QQ.”

Rising Costs

WeChat had 650 million monthly active users, and the mobile version of QQ had 639 million users at the end of the quarter. Adding online payments and making e-commerce transactions easier are part of Ma’s efforts to make money from the world’s biggest collection of mobile message services.

The cost of revenue surged 54 percent to 11 billion yuan as Tencent incurred “significant” bank handling fees for money transfers it offers to consumers for free.

Tencent has gained 35 percent this year, compared with a 22 percent drop for New York-listed Alibaba.

Dungeon & Fighter

Revenue from the Value Added Services unit, which includes online games and messaging, jumped 28 percent to 20.5 billion yuan. Tencent’s gaming lineup includes Journey to the Fairyland in 3-D and Dungeon & Fighter. Marketing and sales expenses rose 7 percent to 2.04 billion yuan.

“Mobile game performances were pretty strong,” Jeff Hao, a Hong Kong-based analyst at China Merchants Securities Holdings, said before the earnings. “The company introduced some popular titles in the third quarter.”

Online advertising revenue doubled to 4.9 billion yuan on demand for video content. Tencent pays for the rights to online streaming in China and generates revenue from ads. That business model is used because subscription TV isn’t as widespread in China as it is in the U.S. and Europe.

Tencent’s content deals include streaming rights for National Basketball Association games, Sony Music Entertainment songs and Time Warner Inc.’s HBO network. Last week, the company added the exclusive online rights in China for the complete Bond franchise.

After struggling to compete with Alibaba in e-commerce, Tencent folded its online retail assets into a venture with JD.com Inc. to create a stronger second-ranked operator.

While Tencent and Alibaba still compete head-to-head in their respective strongholds of messages and e-commerce, the companies are cooperating more in new services. So far this year, they’ve merged their taxi-hailing apps Didi and Kuaidi, and their group-buying sites Meituan.com and Dianping.com.

— With assistance by Edwin Chan, and Lulu Chen

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