China’s Tencent cautious after surge in quarterly profit

HONG KONG (Reuters) – China’s Tencent Holdings (0700.HK), the world’s largest gaming company by revenue, warned on Wednesday of a difficult economic environment even as it reported a better-than-expected 35% jump in quarterly profit.

Growth in the company’s gaming business resumed in the second quarter after a long regulatory freeze in China and its fintech operations also generated sharply higher revenues.

However, Tencent saw a slowdown in online advertising revenue growth amid a slowing Chinese economy and Sino-U.S. trade tensions, and expects conditions to remain tough.

“Our assumption is that the macro environment will remain difficult for the rest of the year and that the situation of the heavy supply of advertising inventory will continue for the rest of the year and potentially into next year,” Chief Strategy Officer James Mitchell told an earnings call.

Tencent made 24.14 billion yuan ($3.4 billion) in net profit for the April-June quarter, beating an average estimate of 20.74 billion yuan from 13 analysts polled by Refinitiv.

Smartphone gaming revenue rose 26% to 22.2 billion yuan, helped by major titles including “Honour of Kings” and “Perfect World Mobile” as well as new releases. Desktop games revenue dropped 9% to 11.7 billion yuan.

“We are quite happy with the recovery of the smartphone games,” Tencent’s President Martin Lau said, referring to a sequential rise in the segment’s revenue even though the second quarter is traditionally weaker. Tencent launched 10 new games in the June quarter, versus only one in the previous quarter.

In 2018, Tencent turned in its slowest annual profit growth in 13 years due to a suspension in approvals for new games.

Approvals resumed in December, with Tencent receiving permission to launch “Perfect World Mobile” in the first quarter of this year.

“FinTech and Business Services” – a new revenue category set up this year that includes payment and cloud services – generated 22.9 billion yuan, up 37% on comparable business last year, helped by rapid growth in commercial payments volumes.

Tencent offers commercial payments services to the large number of merchants and consumers on its social media platform WeChat, which had 1.14 billion users at the end of June.

Tencent also said its wealth management platform, LiCaiTong, had aggregated customer assets of over 800 billion yuan at the end of June as more users kept their money within its payment system.

“Amid the evolving macro-economic and competitive challenges, we continue to invest in enhancing our platforms, services and technologies, for better supporting our users and enterprise customers,” Tencent said in its results release.

FROM ENTERTAINMENT TO ENTERPRISE

The social media and gaming giant is restructuring in an attempt to find new revenue sources as its consumer business comes under pressure from slowing Chinese economic growth amid the Sino-U.S. trade war.

Online advertising revenue grew 16% in the quarter, down from 25% growth in January-March, which Tencent said was due to a “challenging macro environment and increased supply of short video advertising inventories across the industry”.

Mitchell said Tencent would seek to maintain a “healthy although not super rapid rate” of growth by adjusting the rate of its own advertising inventory growth and by leveraging its ability in helping advertisers better target users.

Media advertising revenues dropped 7% year-on-year, which Tencent blamed on the absence of World Cup soccer this year and “unexpected delays to airing certain top-tier drama series”.

In May, amid U.S.-China political tensions, Tencent’s video-streaming platform Tencent Video surprised fans when it announced last minute that it would not broadcast the season finale of “Game of Thrones” as originally scheduled.

China’s media watchdog has also been clamping down on historical dramas this year. Mitchell told the earnings call that Tencent and its subsidiaries have a diversified entertainment portfolio in genres including animations, documentaries and variety shows.

A 1.6 billion yuan year-on-year drop in selling and marketing expenses and a 1.5 billion increase in “net other gains” related to investment activities also contributed to Tencent’s bottom line in the quarter.

Mitchell said Tencent has slowed investment over the past 12 months while its rate of divestment has picked up in recent months. “We will continue to invest at a more measured pace,” he said, especially in “frontier opportunities” in enterprise software, financial technology, education and healthcare.

The company said revenue growth at its cloud services business remained robust as it gained key contracts at PICC, Bank of Communications and in public services such as healthcare and transport in various cities.