Tencent sheds $34b on warning about margins

Mr Ma Huateng (left), chairman and chief executive officer of Tencent, with chief financial officer John Lo at a news conference in Hong Kong on Wednesday. The firm plans to keep spending on areas from artificial intelligence to video, in a bid to an
Mr Ma Huateng (left), chairman and chief executive officer of Tencent, with chief financial officer John Lo at a news conference in Hong Kong on Wednesday. The firm plans to keep spending on areas from artificial intelligence to video, in a bid to anchor growth.PHOTO: BLOOMBERG

Firm ready to sacrifice short-term profitability in pursuit of growth

HONG KONG • Tencent Holdings lost more than US$26 billion (S$34 billion) of market capitalisation after Asia's most valuable company warned it would sacrifice short-term margins, spending on content and technology in pursuit of growth.

Its shares slid 5 per cent in Hong Kong - the biggest fall in over a month - shaving some of the gains that ranked it among the world's best performers over the past decade. The Shenzhen-based company plans to keep spending on areas from artificial intelligence to video that it says may weigh on short-term profitability but anchor long-term growth.

The Internet giant reported that net income almost doubled to 20.8 billion yuan (S$4.3 billion) in the three months ended December, beating projections.

Tencent's business revolves largely around its vast social networks WeChat and QQ, the twin platforms through which more than a billion people consume games, news and online entertainment while paying for a plethora of real-world services.

Chief executive Ma Huateng is now angling to grab a larger slice of an advertising pie dominated by Alibaba Group Holding, while investing in new areas such as financial, retail and computing services.

"Tencent needs to invest in new business. It would help the company build a better ecosystem infrastructure to support growth, but it will hurt margins in the short term," said Mr Benjamin Wu, an analyst at Shanghai-based consultancy Pacific Epoch.

LOOKING AHEAD

Tencent needs to invest in new business. It would help the company build a better ecosystem infrastructure to support growth, but it will hurt margins in the short term.

MR BENJAMIN WU, an analyst at consultancy Pacific Epoch.

Compounding matters, major shareholder Naspers said it would sell stock in Tencent worth about US$10.6 billion, shaving its stake to 31.2 per cent from 33.2 per cent.

The South African company plans to offload as many as 190 million shares, or about a 2 per cent slice of the Chinese firm. It promised, however, to refrain from further sales for at least the next three years.

Analysts at Credit Suisse Group and Citigroup lowered their earnings estimates for Tencent after the results.

The social media giant remains one of the top performers on the Hang Seng Index over the past year, during which it has almost doubled in value.

Tencent's quarterly profit included gains in the quarter of 7.9 billion yuan, due mainly to the initial public offerings of Sea, Sogou and Yixin Group. Those are just three of the 600 companies the company has invested in. Quarterly revenue rose 51 per cent to 66.4 billion yuan but fell short of projections for 68.6 billion yuan.

Revenue from the Value Added Services unit, which includes online games and messaging, climbed 37 per cent but online advertising sales surged a much-quicker 49 per cent.

Costs, however, soared 72 per cent, reflecting the expense of acquiring video and music content to keep users hooked as well as investment in new businesses such as cloud computing.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 23, 2018, with the headline 'Tencent sheds $34b on warning about margins'. Print Edition | Subscribe