Tencent posts surprise profit fall on game woes

Tencent has not been able to cash in on the world's most popular games, including PlayerUnknown's Battlegrounds. Still, it has a powerful asset in its messenger app WeChat (mascots, above), through which it sells in-game items and ads to a billion-pl
Tencent has not been able to cash in on the world's most popular games, including PlayerUnknown's Battlegrounds. Still, it has a powerful asset in its messenger app WeChat (mascots, above), through which it sells in-game items and ads to a billion-plus users.PHOTO: REUTERS

Freeze on new game approvals as regulators in Beijing undergo bureaucratic shake-up

HONG KONG • Tencent Holdings joined Facebook in reporting shockingly poor quarterly numbers, underscoring how tech superstars that led the market to new heights are showing signs of strain.

Tencent surprised investors with its first profit drop in at least a decade after a freeze on new game approvals in China as the regulators are restructured. Executives said they had little clarity on when the process would return to normal, putting more pressure on a company that has lost more than US$160 billion (S$221 billion) of market value since its January peak. The company's New York-traded ADRs plunged as much as 10 per cent on Wednesday.

The very government that has favoured Tencent as a technology champion is now directly hurting its results, with the bureaucratic shake-up in Beijing blocking its path to making money from games.

The Shenzhen-based company relies on new content to draw and keep users on its WeChat messaging service, over which it sells in-game items and advertising to a billion-plus users. Tencent has not been able to cash in on the world's most popular games, including Fortnite and PlayerUnknown's Battlegrounds (PUBG).

"From a revenue growth perspective, gaming is a key area of weakness, our biggest game is not monetisable," its president Martin Lau said during a conference call. "This is something that's a little out of our control, but over time, we'll solve it."

Net income fell 2 per cent to 17.9 billion yuan (S$3.56 billion) in the three months ended June, the company said. That is well short of the 19.3 billion-yuan average of analysts' estimates and reflects fading allure of older titles, increased spending and fewer investment gains. Mobile gaming revenue dropped 19 per cent from the first quarter.

In addition to the delay in new approvals, this week Tencent was ordered by the government to pull Monster Hunter: World just days after its debut, which the company said was a one-time issue.

  • $221b

    Loss in Tencent Holdings' market value since its January peak.

"The results were really bad," said Mr Benjamin Wu, a Shanghai-based analyst with consultancy Pacific Epoch. "The fact that Monster Hunter got taken down shows that even Tencent isn't immune to regulatory crackdowns."

Longer term, Tencent still commands a powerful asset in WeChat, which underpins its gaming and ads business. Monthly active users climbed almost 10 per cent to 1.06 billion in the June quarter - a massive population of consumers not just for games and ads but also fledgling services from video to financial services. Advertising revenue jumped 39 per cent, while video subscription numbers doubled.

Tencent blamed its profit decline also on fewer investment gains. It said it cashed out of start-ups such as Ele.me and Mobike to raise capital to bankroll new services like game live-streaming and in traditional retail.

One potentially promising area is payments, where monthly active users stood at 800 million as of June. Daily transaction volume was up 40 per cent in the quarter. But Tencent also warned of a hit to gross margins by higher requirements on the reserves it must set aside for its financial services business.

Gaming remains its bread and butter. Revenue rose 30 per cent to 73.7 billion yuan - its slowest expansion since 2015 - but fell short of estimates of 77.7 billion yuan.

"Despite having a lot of players for PUBG, its inability to monetise the game is causing a slowdown in revenue growth," said analyst Li Yujie of RHB Research Institute in Hong Kong.

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A version of this article appeared in the print edition of The Straits Times on August 17, 2018, with the headline 'Tencent posts surprise profit fall on game woes'. Print Edition | Subscribe