Chinese online giant Tencent posts 61% rise in net profit

Alicia Cross
May 18, 2018

Chinese social media and gaming giant Tencent Holdings clocked a better-than-expected 61 per cent jump in quarterly net profit and its first sequential gross margin rise in almost 3 years, driven by a jump in mobile gaming revenue and investment gains. Analysts tracked by Thomson Reuters have a mean price target of 513.41 Hong Kong dollars, representing a more than 23 percent rise from Thursday's trading price. Smartphone games revenues alone were up 68 percent year-on-year to 21.7 billion yuan, thanks to titles such as "Honour of Kings". WeChat had 1.04bn monthly active users - crossing the billion mark for the first time. Revenues were up 48 percent year-on-year.

WeChat is China's largest messaging service, through which a variety of businesses including gaming, advertising and social networking have flourished in recent years.

PC games revenues were flat year-on-year, but analysts said that there were tough comparisons with the first quarter of 2017, and overall the games business was in good shape.

Finally, revenues from the online advertising business increased by 55 percent, with social and other advertising revenues up 69 percent and media advertising revenues lifting 31 percent.

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Looking forward, Tencent CEO Ma Huateng said the company will continue to invest in improving its own products and enabling services for its partners. Tencent has the rights to run the game in China but said that it is "yet to be monetized", highlighting the potential future of the title.

Tencent finished the day 3.74 per cent higher at HK$411 after surging as much as 7.07 per cent in its biggest daily rise since August 2015. Earnings reported in the fourth quarter of 2017 underwhelmed investors and concerns were rising that spending increases could hit margins. That's partly thanks to a one-time gain of nearly 7.6 billion yuan from its investments in arenas like video and news. Capex jumped 200 percent to CNY 6.318 billion.

Bernstein analysts estimate Tencent's merchant subsidy will be around $1 billion in 2018 while subsidies by Alibaba's Ant Financial Services affiliate could be as high as between $2 and $4 billion.

Despite criticism that Tencent has lost its innovation ability and has become more like an investor, the company has proved that its investing activities actually go hand in hand with the development of its core business.

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