DUBLIN — Chinese gaming giant Tencent, which has been a star investment for Naspers, has been under pressure recently. Its share price has been under pressure over worries of slowing growth and a growing government crackdown on the online gaming industry. But Tencent hit back on Wednesday with a strong earnings report, featuring higher-than-expected net income growth. This is good news for Naspers, which has been dinged as Tencent shares stumbled. However, as the article below explains, there are still some serious concerns about the possible impact of the gaming crackdown on Tencent’s long-term prospects. – Felicity Duncan
Tencent Posts Solid Earnings, But China’s Game Freeze Clouds Future
By Shan Li
(The Wall Street Journal) BEIJING — Fuelled by advertising sales and investment gains, Tencent Holding Ltd. reported a 30% jump in third-quarter profit — one that came in spite of a regulatory chokehold on videogames, its biggest business.
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The Shenzhen-based company, which also operates China’s dominant WeChat social network, said that net income climbed to 23.3 billion yuan ($3.39 billion) in the three months ended Sept. 30, beating analyst expectations. Revenue was up 24%, to 80.6 billion yuan, in line with forecasts.
The net income, however, included 8.8 billion yuan ($1.3 billion) from investments, which were turbocharged by the initial public offering of Meituan Dianping, the food and delivery company backed by Tencent. That is more than twice what Tencent clocked in investment gains from the same period a year ago.
Tencent executives didn’t mention the videogame approval freeze in their prepared remarks to analysts. In their second-quarter earnings call in August, Tencent executives said the freeze contributed to a rare 2% drop in net income — heightening concerns about the company’s near-term prospects.
“In terms of the regulatory approval, at this point we don’t have much of an update,” Tencent President Martin Lau said in response to an analyst’s question Wednesday. “We are waiting for the government to restart approval for the games.”
In limiting their comments on the game freeze, Tencent executives may have been seeking to avoid angering Chinese regulators, said Douglas Morton, head of research in Asia for Northern Trust Capital Markets.
During the previous quarter’s earnings call, Tencent’s leaders were “commenting on it in an arguably arrogant way when there are new regulators in place,” Mr. Morton said. “It’s probably why they didn’t comment on this occasion.”
China has blocked approval of new titles amid concerns about violent content and the amount of time schoolchildren are spending playing games.
In response, Tencent has begun implementing restrictions on game time for minors, including a one-hour limit on play and a log-in ban from 9pm to 8am for kids 12 years and younger.
Tencent Chief Strategy Officer James Mitchell said the rules aren’t expected to be a major drag on revenues.
“The system is impacting the time minors spend on the games, which is the intention,” Mr. Mitchell said. But the financial impact wouldn’t be significant, Mr. Mitchell said, since the “vast majority” of gaming revenues come from older users.
Even so, Tencent said online games accounted for 34% of revenue in the third quarter, down sharply from a 41% share in the like quarter one year ago. Game revenue has been trending down for several years, however, accounting for 56% of revenue in the third quarter of 2015.
For the third quarter, online game revenue overall dropped by 4% over the year-earlier period but mobile gaming revenue was up 7%. PC game revenue was down 15%.
The 15% decline in PC gaming revenue and modest 7% growth in mobile gaming compared with last year means that hit games such as “League of Legends” are losing traction among gamers, said Benjamin Wu, an analyst at research firm Pacific Epoch.
It is especially worrisome given that the third quarter is usually a high season for gameplay in China, he said.
“It should be a peak quarter, due to holidays for most of the students,” he said.
That could spell trouble ahead, he said. The games that Tencent is acquiring from independent gaming studios, the main source of new games in its pipeline, tend to have a shelf life of three to six months. That can’t sustain the company’s gaming revenue if the freeze continues, Mr. Wu said.
Helping ease the pain of the gaming freeze was ad revenue. Tencent said that revenue from its online-advertising business was up 47%. Advertising on its social networks jumped 61% thanks to growth in its QQ and WeChat social networks.
Tencent’s revenue was in line with expectations of analysts polled by FactSet. But its profit blew past expectations of 18.8 billion yuan.
Tencent reported earnings after the close of trading on the Hong Kong exchange, where the shares fell to 272.2 in Hong Kong dollars. The shares are down nearly 33% from a January high.
Write to Shan Li at [email protected]
