Tencent logs big profit rise despite China game crackdown

Tencent headquarters (Bloomberg pic)

SHANGHAI: Chinese internet giant Tencent said Wednesday it posted a nearly 30% profit rise in the latest quarter, handily beating expectations as new video games already in the pipeline mitigated any impact from a government crackdown on the lucrative game sector.

Shenzhen-based Tencent said net profit came in at 23.33 billion yuan (US$3.39 billion) in the three months ending September 30, surpassing a Bloomberg average analyst estimate of 18.39 billion yuan.

Tencent’s earnings were hotly anticipated after the company posted a 2% year-on-year fall in profit in the preceding quarter, which Bloomberg data indicated was the first such decline in at least a decade.

Known for its ubiquitous WeChat social media and messaging programme, Tencent had ridden revenues from gamers to surpass even Facebook last year and vault into the ranks of the world’s most valuable companies.

But it has suffered a dramatic reversal this year after China’s government effectively froze approvals of new game titles earlier this year, officially due to youth gaming addiction concerns.

The freeze, and tighter restrictions on game-playing, has seen a stunning amount lopped off of Tencent’s total market value this year — around a quarter of a trillion dollars — as its Hong Kong-listed shares have sagged nearly 33%.

But there was little hint of trouble in Tencent’s third-quarter results.

Tencent said smart-phone game revenue grew 7% in the quarter to 19.50 billion yuan, though PC game revenues fell 15% to 12.4 billion yuan “due to user migration to mobile games and the high base in the same quarter last year.”

Overall revenues grew 24%, including a 47% jump in online advertising, thanks in part to the release of 10 new titles during the quarter, Tencent said, adding that it had 15 more games ready for release.

Analysts said China’s gaming industry — the world’s largest, and dominated by Tencent — could feel a squeeze soon due to the cut-off in title approvals.

Game on

But they added that licensing was expected to resume possibly as early as year-end after the government finishes implementing a tightened regime of restrictions — now being rolled out — aimed at curb playing time among minors.

“Small players (game companies) are facing a threat, but Tencent is doing pretty well,” said Charlie Chai, an analyst with 86Research in Shanghai.

“It has a deep pipeline of games which already have licences, so for the moment those games can tide them over for at least another quarter.”

Tencent is generally viewed as a proxy for China’s gaming market, which is estimated to be worth nearly $40 billion according to industry trackers Newzoo.

Gaming industry analysts Niko Partners said in a recent report that Chinese demand remained strong.

“Chinese gamers are still enthusiastically gaming and spending money on and in games. The market revenue continues to grow,” it said.

The exact reasons for the crackdown on games remain unclear, but analysts believe an internal restructuring in the agency that approves games is also partly to blame.

Tencent still has a powerful asset in WeChat, which has more than a billion users and underpins its gaming and ads business.

“Tencent still has a great portfolio, so we’re still confident on the company’s outlook,” said Norman Hui of Zhongtai International Securities.