Tencent Sees Flat Growth in Games Amid Push to Improve Platform

Aug 13, 2014 11:36 pm ET

Aug. 14 (Bloomberg) -- Tencent Holdings Ltd. expects growth in mobile-game revenue to plateau as Asia’s biggest Internet company works to improve quality and expand titles at a business that generates more than half of its sales.

“Consequently, it’s possible that our smartphone game revenue will be more or less stable around current run rates for the next couple of quarters,” Chief Strategy Officer James Mitchell said on a conference call yesterday. The stock fell after it was cut to neutral by analysts at HSBC Holdings Plc, who cited the games forecast.

Games have underpinned Tencent’s growth and helped it compete with Alibaba Group Holding Ltd. and Baidu Inc. for the attentions of China’s 632 million Internet users. The company is working with creators of the Candy Crush Saga and Final Fantasy titles to expand entertainment options as it seeks to integrate e-commerce functions to promote shopping by the billion users of its WeChat and QQ messaging applications.

“Management is intentionally trying to slow down its effort to make money from mobile games, to provide better user experience,” said Bill Fan, a Hong Kong-based analyst at China Securities Co. “They are trying to push more games that will make users stay on the platform longer.”

Shares of Tencent fell 2.2 percent to HK$130.30 as of 11:31 a.m. in Hong Kong, the biggest decline in a week.

Chat Users

Second-quarter online game revenue rose 46 percent to 11.1 billion yuan ($1.8 billion), the company said yesterday in its earnings results. Net income rose to 5.84 billion yuan in the three months ended June from 3.68 billion yuan a year earlier, the company said in a statement.

Revenue for the quarter rose 37 percent to 19.7 billion yuan as WeChat and the Mobile QQ service added a combined 321 million monthly active users -- more than the entire population of the U.S. Online advertising sales jumped 59 percent on revenue from video advertising and the impact from soccer’s World Cup.

Tencent’s sales growth this quarter is expected to slow to 31 percent, according to the average of eight analyst estimates compiled by Bloomberg. That would be the slowest since the June quarter of 2007.

“A lot of tactical investors will do short-term investment into the company before the results, and if they don’t see any fundamentally positive boosters, they will sell out,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP by phone.

Tencent was ranked first in Apple Inc.’s China App Store by revenue and free downloads from January through July, according to the statement.

Timi Match

Mobile game revenue increased to 3 billion yuan, helped by in-game promotions, the company said. The company’s Timi Studio has offered a number of popular titles such as Timi Run Everyday and Timi Match Everyday.

The size of the online gaming market is projected to grow to 225 billion yuan by 2017, according to Shanghai-based Internet consultant IResearch.

WeChat, known as Weixin in Chinese, may be worth as much as $64 billion given the potential for the service to be monetized, Elinor Leung, an analyst at CLSA Ltd., said in a March 10 report.

WeChat and QQ face a harsher regulatory environment after the official Xinhua News Agency said China’s government issued rules restricting the dissemination of certain types of news, including political, through instant-messaging apps to authorized media outlets.

Alibaba Competition

Rules tightening management of the apps are meant to safeguard national security, according to the Aug. 7 report. App providers also will be required to implement more stringent rules on real-name registration for users, the state-run agency said.

Competition among Internet companies is intensifying as Alibaba started the process in March for a U.S. IPO. Chinese Internet companies led by Alibaba and Tencent announced 149 acquisitions and investments with a value of about $17 billion since 2012, according to data compiled by Bloomberg.

“It is extremely competitive, especially in Western markets, still very competitive in Asian markets, though we have stronger positions in some of the Asian markets,” Mitchell said on the call. “The strongest competitor we’ve faced so far in most markets is” WhatsApp Inc.

Tencent is trying to fend off Alibaba by adding more services through acquisitions. The size of the China e-commerce market is estimated to more than double to 21.6 trillion yuan in 2017 from 9.9 trillion yuan last year, according to Shanghai- based Internet consultant IResearch.

E-Commerce Strategy

Tencent folded its own e-commerce assets into JD.com after acquiring a 15 percent stake in the competitor of Alibaba in March and has been directing traffic from its chat services to generate more business.

A new single-click link to JD.com in the Chinese version of WeChat has produced an eightfold increase in daily transaction volumes, compared with the previous two clicks, JD.com said in June. Tencent also provided similar access to users of its Mobile QQ instant messenger.

“Our e-commerce transaction business has entered a transitional phase subsequent to our strategic transaction with JD.com,” Tencent said in the statement. “We expect the e- commerce segment’s revenues and costs to decline further as we continue shifting focus toward supporting” the partnership.