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Tencent posts worse-than-expected profit decline

27 March 2019

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by Anchor

Chinese tech giant and Asia’s second-most valuable listed company, Tencent (in which Naspers has a 31% stake), posted a worse-than-expected 32% YoY drop in 4Q18 profit on Thursday (21 March). This was its largest profit decline since listing in 2004, according to CNBC, and was due, in part, to the slowdown in the growth of its mobile gaming division (its bread-and-butter business). The segment was especially hard hit by Chinese regulators freezing gaming approvals for nine months in 2018 as a result of increased scrutiny of video games by the government (although sales from Tencent’s gaming division were still better than expected). Mobile game revenues stood at CNY19bn, but we note that despite China’s gaming approvals backlog, typically the fourth quarter is also seasonally slow. In addition, the China’s economic slowdown seems to have also cooled demand for advertising (another of Tencent’s most profitable enterprises), which has resulted in the company spending billions to sustain growth with investments in everything from cloud and entertainment to retail.

Gaming is Tencent’s biggest division and while gaming approvals in China have now resumed, Tencent has yet to get approval to monetise Fortnite or a mobile version of PlayerUnknown’s Battlegrounds (PUBGS), which is the world’s most popular smartphone game. It was able to release nine games in the quarter under review, but couldn’t provide an update on when PUBG would start making money for the company in China.

Tencent’s net profit came in at CNY14.2bn (c. $2.12bn [$1 = CNY6.6881]), vs the CNY18.3bn Refinitiv consensus estimate. Revenue rose 28% YoY CNY84.9bn, slightly ahead of the Refinitiv consensus estimate of CNY83bn. Tencent attributed this, in part, to strong growth in sponsorship advertising revenue. Adjusted EPS were also above expectations. Sales from its Value Added Services unit, which includes online games and messaging, climbed 9% YoY to CNY43.7bn. However, costs soared 43% YoY as content and financial technology bills increased.

Tencent’s Cloud sales more than doubled to CNY9.1bn , while WeChat, China’s dominant messaging and social network app, saw its monthly active users (MAUs) rise to 1.1bn, while the mobile version of QQ had 699.8mn users at the end of the quarter.

Tencent is also reportedly shaking up its management, with Bloomberg reporting that the company has put 10% of its executives on notice, “with poor performers to be weeded out to bring in new blood.”

Tencent declared a final dividend of HKD1.00/ share vs HKD0.88/ share in 2017.

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