Tencent stuns with first profit drop in a decade1 min read . Updated: 15 Aug 2018, 11:55 PM IST
Decline comes on a freeze on game approvals in China that smothered its pipeline
Hong Kong: Tencent Holdings Ltd. joined the ranks of Facebook Inc. by reporting shockingly poor quarterly numbers, underscoring how tech superstars that led the market to new heights are showing signs of strain.
Tencent surprised investors with its first profit drop in at least a decade—a consequence of a freeze on game approvals in China that smothered its pipeline. That puts more pressure on a company that has lost more than $160 billion of market value since its January peak. The company’s German-traded shares plunged as much as 10%.
The poor result punctuates an abrupt about-face in sentiment this year as Beijing chilled the world’s largest gaming arena. The Shenzhen-based company relies on new content to draw and keep users on WeChat, via which it sells in-game items and advertising to a billion-plus users. A regulatory freeze and this week’s removal of hit game Monster Hunter: World is hampering that effort, spooking investors long accustomed to Tencent’s favoured position as one of China’s leading corporate lights.
Net income fell 2% to 17.9 billion yuan ($2.6 billion) in the three months ended June, the Shenzhen-based company said. That’s well short of the 19.3 billion-yuan average of analysts’ estimates and reflects fading allure of older titles, increased spending and fewer investment gains. Mobile gaming revenue dropped 19% from the first quarter.
“The results were really bad," said Benjamin Wu, an analyst at Shanghai-based consultancy Pacific Epoch. “The fact that Monster Hunter got taken down shows that even Tencent isn’t immune from regulatory crackdowns."
Shares of Naspers Ltd, the biggest investor in Tencent and considered a proxy for the stock, fell 10% in Johannesburg.
China is said to have halted new game approvals and this week forced the pulling of the Monster Hunter game just days after its debut.
China may resume approvals around September, Wu said. Even if the process starts, it typically takes two to three months to work its way through, signalling potential weakness in the third quarter for companies like Tencent.
Longer -term, Tencent still commands a powerful asset in WeChat, the ubiquitous messaging service that underpins its gaming and ads business. Monthly active users climbed almost 10% to 1.06 billion in the June quarter—a massive population of consumers not just for games and ads but also fledgling services from video to financial services. Advertising revenue jumped 39%, while video subscription numbers doubled.