Tencent shares rise after Q1 profit beats

Shares of Tencent opened up 7 per cent in Hong Kong on Thursday after ithe company reported better-than-expected first-quarter results. Bobby Yip  Reuters

Tencent Holdings (00700.HK) managed to beat market expectations, reporting a 61 percent year -on-year increase in net profit for the first quarter, at 23.29 billion yuan.

Revenue from PC games was flat compared to past year, but analysts believe the comparison was tough with the 2017 first quarter, and overall its games business was strong. "Smartphone games revenues alone were up 68 percent year-on-year to 21.7 billion yuan, thanks to titles such as 'Honour of Kings'".

Tencent's margins rose or fell last quarter depending on what's included. Tencent has exclusive release rights for PUBG in China but says the game is "yet to be monetized", implying future additional revenue stream from the title.

Looking forward, Tencent CEO Ma Huateng said the company will continue to invest in improving its own products and enabling services for its partners. Company president Martin Lau Chi-ping had warned in March during its 2017 earnings call that this year Tencent would aggressively step up its investments in long- and short-form video content, digital payments, cloud services, artificial intelligence and smart retail, even though it could harm the company's profitability in the short term. Asia's largest company by market capitalization, Tencent reported $14 billion debt at the end of March, compared with $16 billion of cash at the same time past year.

There's an argument to be made for stripping out extraneous items because Tencent runs the games and social side of the business itself, but doesn't have direct control over investees. And, as this chart from Statista shows, Tencent's three main social media platforms have a combined user base of 2.4 billion, slightly above Facebook's 2.2 billion users. But the cost of revenue in that category doubled to 11.91 billion yuan, due to subsidies and promotional expenses. It invested $632 million in game-streaming platforms Douyu in March, $462 million the same month on Huya.

Tencent's shares have fluctuated sharply this year.

It's estimated that Tencent has acquired stakes in almost 300 companies since 2013, about 50 on average a year. Tencent has big stakes in several notable Chinese companies, including e-commerce giant JD.com (JD).

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