* Q3 net profit up 32 pct on strength in online games
* But falls short of market estimates as costs soar
* Tencent shares up 72 pct this year as new forays welcomed
(Adds analyst quote)
By Melanie Lee
SHANGHAI, Nov 14 Tencent Holdings,
China's biggest online gaming and social networking company,
surprised with a rare earnings miss, as efforts to expand into
new businesses hit margins and the number of fee-paying users
for its Internet services fell.
Searching for fresh revenue streams, Tencent has steadily
expanded into e-commerce and online video but the highly
competitive and cost-heavy nature of both these industries has
meant that Tencent has had to spend in order to boost sales
"The bottom line was a bit of a miss compared to our numbers
and the Street and it's largely due to Tencent's margins," said
Hong Kong-based Nomura analyst Jin Yoon.
"Margins will have to continue to go down if this company
continues to invest in these negative margin businesses," Yoon
Net profit for the third quarter climbed 32 percent to 3.2
billion yuan ($514 million) from a year earlier, helped by
strength in its core online gaming business.
But it fell short of an average estimate of 3.5 billion yuan
in a Reuters poll of nine analysts as cost of sales soared 80
percent. Tencent's e-commerce business had the lowest margins,
as costs were equivalent to 96 percent of that segment's sales,
followed by online advertising, where costs were equivalent to
50 percent of that segment's revenue.
Its e-commerce revenue rose 32 percent from the previous
quarter to 1.1 billion yuan.
Tencent, which is more than 30 percent owned by South
African media group Naspers Ltd, is a relatively new
player in China's e-commerce industry which was worth $45
billion in the second quarter. In the second quarter, Tencent
had 4.5 percent of the market, behind 360buy and Alibaba Group's
The forays into new businesses have, however, found favour
with investors this year, driving its shares 72 percent higher,
compared with a 16 percent climb for the Hang Seng Index.
Tencent said the number of fee-paying subscribers for
value-added Internet services fell 4.8 percent in the quarter
after it initiated a drive to improve its subscriber base by
cutting out user accounts where fee-collection was unlikely.
The company also said the consumer shift to mobile devices
was bringing some pain and might pose a risk to its traditional
business model -- where users buy virtual currency and virtual
items to personalise their accounts. Tencent's value-added
Internet service business contributes more than 72 percent to
its total revenue.
Tencent also noted that a slower Chinese economy may have
hurt its online advertising business, which online video is a
Online gaming continued to drive much of quarterly profit
growth, with Tencent's new game "League of Legends" gaining
traction in the market to join stalwarts "Cross Fire" and
"Dungeon & Fighter" as China's most-searched-for games.
Overall third-quarter revenue jumped 54 percent from a year
earlier to 11.6 billion yuan, matching analysts' estimates, with
online gaming revenue climbing 44 percent to 6 billion yuan.
Tencent said that Weixin or WeChat, its highly popular
mobile chatting app that has been a particular focus for
investors, had taken good steps forward and had more than 200
million users as of end-September.
"Several of our investment initiatives, such as open
platform, Weixin and online video, made progress in driving user
engagement or monetisation," Tencent's Chief Executive Pony Ma
said in a statement.
"Our focus remains on building our user base and enhancing
our user experience, particularly during this period of rapid
mobile Internet growth," Ma said.
Shares of Tencent ended 0.9 percent lower on Wednesday
before its results were announced, versus a 1 percent rise for
the Hang Seng.
($1 = 6.2265 Chinese yuan)
(Reporting by Melanie Lee; Editing by Edwina Gibbs)