Tencent reports drop in profit – weak games and advertising

FILE PHOTO: A Tencent sign is seen at the World Internet Conference (WIC) in Wuzhen, Zhejiang province, China, October 20, 2019. REUTERS/Aly Song/File Photo

BEIJING (Reuters) – China’s Tencent Holdings Ltd reported a surprise 13% drop in quarterly profit on Wednesday hurt by a weaker-than-expected core smartphone games business and falls in media advertising and computer games revenue.

China’s biggest gaming and social media company has faced a slowing economy and new rules on games to tackle addiction among young people.

Tighter government controls on content and intensifying competition from rivals such as ByteDance has not helped either.

Profit fell to 20.38 billion yuan ($2.91 billion) from 23.33 billion a year earlier and missed the 23.45 billion expected by analysts, 15 estimates compiled by Refinitiv for the three months to September 30 showed.

It was Tencent’s lowest quarterly profit this year and its first profit fall since the fourth quarter of 2018.

Revenue rose 21% to 97.2 billion yuan but was short of the 98.2 billion expected by 17 analysts on average.

Its core smartphone gaming business, including major titles such as Honour of Kings, Perfect World Mobile and Peacekeeper Elite, reported a 25% rise in revenue to 24.3 billion yuan.

Jefferies analysts said this was weaker than their forecast of 32% growth.

Personal computer games revenue fell by 7% after a recent update of Dungeon & Fighter attracted fewer paying users than a year earlier, Tencent said.

China’s regulator stopped approving new games for monetisation for about nine months last year, resulting in Tencent reporting its lowest annual profit growth in 13 years.

Approvals restarted in December, with Tencent receiving permission to monetise Perfect World Mobile in the first quarter of 2019.

Media advertising revenue fell 28% to 3.7 billion yuan due to lower intake on platforms including Tencent Video which the firm attributed in part to “unpredictability in scheduling major content releases.”

Competition from Chinese social media firm ByteDance, whose products include short video app Douyin, likely also had an impact, said Morningstar analyst Chelsey Tam.

“Ad customers might not have as much money with the economic slowdown, and there is more fierce competition in ads business given that Bytedance is motivated before its (possible) public listing,” she said, referring to reports that ByteDance is considering an initial public offering.

James Mitchell, chief strategy officer of Tencent, blamed the sharp pace of decline in media advertising revenue on the uncertainty of airing time of drama series.

Benjamin Wu, an analyst with Pacific Epoch, said Tencent would have to further grapple with China’s restrictive censorship and trade disputes with US in the coming quarters.

“We think for the next two quarters US games will be harder to get government approvals for,” he said.

Revenue in FinTech and Business Services, a category set up this year incorporating payment and cloud services, rose 36% to 26.8 billion yuan, helped by rapid growth in commercial payment services. Cloud service revenue grew 80% to 4.7 billion yuan.

“We have a broad portfolio, and it’s almost inevitable that given any point of time there will be activities that are underperforming, and there will be other activities that are outperforming,” said Mitchell.

($1 = 6.9941 Chinese yuan renminbi)

(Reporting by Pei Li and Brenda Goh; editing by Kim Coghill and Jason Neely)

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