Tencent has posted its strongest growth in more than seven years, riding the success of games like Honour of Kings and a rapidly expanding Internet advertising business. Shares in Johannesburg-listed Naspers, which owns a third of Tencent, rose to a new record high.
China’s largest social network operator reported a 61% rise in revenue to 65.2bn yuan (US$9.8bn) in the September quarter, outpacing the 61bn yuan projected. That also marked the biggest gain in sales since 2010, when revenue was a mere one-fourteenth of its current level. Profit also beat estimates.
Tencent, operator of the WeChat messaging and entertainment service that’s become near-ubiquitous across China, continues to deliver on hit games while pushing more and smarter advertising to its billion-plus users. The mobile battle game Honour of Kings helped it expand smartphone gaming revenues 84% in the period. Tencent, which has built a 12% stake in Snapchat-owner Snap, is now exploring new sources of growth in the cloud, financial services and movies and music.
“Games will be still be a key revenue contributor going forward,” said Benjamin Wu, an analyst at Shanghai-based consultancy Pacific Epoch. “Its key title Honor of Kings is looking to sustain its gross revenue to the next year.”
Net income surged 69% to 18bn yuan, also blowing past projections for 15.8bn yuan. Tencent’s shares closed 1.3% lower, before earnings were announced. Naspers climbed as much as 4.1%.
Investors bet earlier in 2017 that some of the company’s boldest investments would finally pan out, creating one of the world’s most richly valued companies in the process. The global leader in gaming tapped the spending power of some 200m players, helping mobile games revenue surpass that of desktops for the first time in the June quarter. Tencent’s pipeline of titles includes several from South Korean developers that were held back amid political tensions with China, boding well for 2018.
“In 2018, we believe the company will keep its momentum of growth through a strong pipeline of games. The Korean games delayed in 2017 will be released next year,” Wu said.
A still-nascent advertising and finance business on WeChat has also expanded at a rapid clip, furthering its ambition of eventually becoming an ad powerhouse along the lines of Alibaba Group or Facebook. Online advertising sales grew 48% in the quarter.
For the longer term, it’s investing billions of dollars in artificial intelligence research, both to better target marketing as well as underpin future product categories. Tencent is said to have developed an autonomous driving system, among other areas it’s delving into.
Like Alibaba, Tencent is largely confined for now to an increasingly saturated home market but is taking steps toward a more global business. Its financial muscle helps it withstand new competition from the likes of Jinri Toutiao and help it retain pole position in Chinese gaming and social media. It’s also plowing money into music, e-books and video streaming — the content it needs to keep users hooked on its WeChat social media and messaging service.
While it’s unclear what it plans with its chunk of Snap, the acquisition comes after a failed attempt to pick up WhatsApp and may mark a renewed effort to feel out markets beyond its home turf. Tencent has said the pair will share experiences and expertise in social networking, and cooperate on game distribution.
WeChat had 980m monthly active users, up almost 16% from the previous year and now sending 38bn messages daily. But the mobile version of QQ, Tencent’s other mainstay social network, had 2.5% fewer users at the end of the quarter.
“Tencent still has a lot of potential for growth,” said Billy Leung, an analyst with Haitong International Securities in Hong Kong. “Advertising growth was strong, as it improved on using big data and AI for social ads.”
On the deals front, the stellar debut of e-books unit China Literature may prompt more mega spin-offs. It’s already said to be prepping its music arm for an IPO that could raise at least $1bn next year.
“Tencent has been investing in enhancing its technology on all business fronts,” Saiyi He, an analyst with Huatai Research in Hong Kong, wrote last week. It “should be able to effectively increase its market share in new media advertising.” — Reported by Lulu Yilun Chen, (c) 2017 Bloomberg LP