Gains On Investments Pushes Up Tencents Earnings, Triggering Revival Hopes

Tencent Holdings Lt.’s quarterly earnings beat estimates, boosted by gains on investments, giving shareholders much-needed assurance the Chinese gaming behemoth is bound for a revival.

Net income rose 17% to 27.21 billion yuan ($4 billion) in the three months ended March compared with the 19.4 billion-yuan average of analysts’ estimates. Revenue climbed 16%, about a third of the pace a year earlier and the slowest since its 2004 listing.

Tencent’s recovering from a brutal 2018. Last week, China’s largest social media company finally unveiled a viable entry in the Battle Royale genre, a red-hot arena it’s been shut out of since Beijing suspended game approvals last year. Now that regulators are again green-lighting titles, investors are counting on the worst being over as the company invests in video and news personalization to win back users from Bytedance Ltd.

“Missing consensus top-line estimates is not ideal, but the bright spot is growth came where it mattered — in games, which is their most profitable segment,” said Vey-sern Ling, an analyst at Bloomberg Intelligence. “The 11% sequential jump in mobile game sales bodes well for the sustained recovery of the business over 2019, especially with the addition of new games.”

The profit was boosted by 11.1 billion yuan of gains, including adjustments for fair value of investee companies, it said. Tencent on Wednesday also began breaking out results from its fledgling fintech division, which houses not just the immensely popular WeChat Pay mobile service but also operations from cloud computing to wealth management. The unit expanded revenue 44% to 21.8 billion yuan in the March quarter.

Shares of Tencent rose 0.9% in Hong Kong before earnings were announced. The stock has gained 19% this year, compared with a 28% rise for New York-listed rival Alibaba Group Holding Ltd. Shares of Naspers Ltd., its biggest shareholder, rose more than 1% in Johannesburg.

Revenue from the Value Added Services unit, which includes online games and messaging, rose just 4.5% to 49 billion yuan. Online advertising revenue surged 25% to 13.4 billion yuan, but that was down from previous years as the economy slowed and the business gained scale, Tencent said.

WeChat had 1.112 billion monthly active users at the end of March, an increase of 6.9% from a year earlier, while the mobile version of QQ had 700.4 million users at the end of the quarter.

Tencent last week unveiled Game for Peace, a self-produced title in the same vein as global smash PlayerUnknown’s Battlegrounds. It concurrently pulled the plug on the mobile version of PUBG in China, a title it was never allowed to make money on during the months-long freeze.

Game for Peace pays tribute to China’s air force and sought out the country’s military recruitment arm for advice during development. Users can port or transfer their accounts easily, and in many cases the app automatically replaces PUBG on phones.

Tencent garnered $14 million of in-app purchases within 72 hours of the title’s launch, according to research consultant Sensor Tower. Game for Peace comes as revenue from desktop games continues to decline and its tentpole Honour of Kings loses steam. The latter hack-and-slash game saw monthly active users fall 12% in March from the previous month, according to David Dai, a Hong Kong-based analyst at Bernstein.

“We expect Tencent’s fundamentals to improve in the second half, backed by the launch of new games and stronger monetization potential of shooting games,” Alicia Fu, an SWS Research analyst, said in a research report prior to earnings. “We expect to see a more diversified and sustainable recurring revenue model for Tencent’s mobile games.”

Bloomberg