The Tricky Task of Tracking Tencent's Earnings

Hello, this is Lulu. When it comes to accounting for investments, Tencent and Alibaba play by different rules.

This past quarter Tencent surprised investors by blowing past analysts’ profit estimates by about 35 percent. Most of that was fueled by the internet company’s gains in portfolio investments. With their core businesses growing strong—Alibaba in e-commerce and Tencent in gaming—the two companies have ventured out to invest a combined $55 billion in everything spanning from FinTech to bike rentals.

How these two Chinese web giants account for valuation increases and writedowns in their startup investments is worth noting, because both have sprinkled cash into more than 100 companies, according to data compiled by Bloomberg.

Alibaba, listed in the U.S., reports under GAAP rules and doesn't record any valuation gains for minority investments in public or private companies. For example, Alibaba is a minority shareholder in Weibo; when it bought into the social-media company in 2013, it was valued at just more than $3 billion. Now, Weibo is worth more than $20 billion, yet Alibaba doesn't mark that as a gain, unless one day it sells the stake or takes full control of the enterprise. Alibaba does include on its income statement any share of profit or losses made by companies it has stakes in, such as Koubei.

Tencent, however seems to be a different story. Reporting under IFRS rules, Tencent is listed in Hong Kong, where local property entities often mark up their assets for income gains. The company didn't fully disclose how and what it categorized as “other gains" in earnings this quarter. While many analysts might consider this a one-off thing, these non-operating items “can fluctuate from quarter to quarter based on non-recurring events,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Services. "Investors might want to do some adjustments to get the real sense of Tencent's operating margin."

That could mean for stakeholders, estimating Tencent’s financial performance could become more of a guessing game.

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