Tencent quarterly revenue misses estimates; Naspers shares slip 2%

By Lulu Yilun Chen

(Bloomberg) – Tencent Holdings Ltd.’s quarterly revenue missed estimates after its hit game Peacekeeper Elite failed to compensate for disappointing ad growth or deter hard-charging rivals like ByteDance Inc.

China’s leading social media and entertainment company posted revenue of 88.8 billion yuan ($12.7bn), lagging the 93.4 billion yuan average of analysts’ estimates. Net income rose a better-than-expected 35% to 24.1 billion yuan in the three months ended June, but that was boosted by one-time gains.

Tencent and arch-foe Alibaba Group Holding Ltd. are fighting to sustain growth as the Chinese economy slows. Tencent is trying to bounce back from a horrendous 2018 when regulators froze approval of new games, walloping its most important business. Regulators are green-lighting titles again, but at a slower pace. Tencent is also pushing into newer arenas such as financial and cloud services, but internet wunderkind ByteDance is siphoning off advertising with hot apps such as video services Douyin and Tiktok.

“Tencent’s advertisement revenue was disappointing, partly due to competition from ByteDance,” said Canaan Guo, an analyst at Pacific Epoch. “Even though WeChat increased its ad inventory, it wasn’t able to fully sell its ad space because it charges more than rivals.”

Shares in Naspers Ltd., which as Tencent’s biggest shareholder is a proxy for the Chinese company when Hong Kong is closed, slid 2.8% in Johannesburg.

Tencent can still accelerate growth in the second half, riding hits like Peacekeeper Elite and older, durable titles such as Honour of Kings. It released 10 games in the second quarter. To fend off ByteDance, it’s adding content and services to its WeChat social media super-app, partnering with the likes of Q&A platform Zhihu and funnelling more of its 1 billion-plus users to mini-programs – lite apps that offer third-party services from ride-hailing and food delivery and bike sharing.

“We expect gaming revenue to re-accelerate starting from the second quarter onward,” said David Dai, a Hong Kong-based analyst at Bernstein, adding this would also drive an acceleration of overall revenue.

Tencent’s biggest hit of 2019 – bereft of much of the violence typical of duel-to-the-death titles, to appease regulators – is expected to generate $1bn in revenue by the end of the year, according to gaming consultant Niko Partners. It’s snagged more than 50 million daily active users for its death-match entry Peacekeeper Elite since the title launched, Tencent said.

The game should have brought in $49m of revenue in May and June, or about two thirds of the revenue generated by long-time favourite Honour of Kings, Bernstein’s Dai said. He estimates that Tencent’s gaming revenue growth could surpass 20% in the third and fourth quarters.

Shares of Tencent rose 1.8% in Hong Kong before earnings were announced. Adjusted earnings per share were 2.46 yuan, surpassing the 2.39 yuan average projection.