Tencent says payment subsidy war set to continue after profit beat

HONG KONG (Reuters) - A subsidy war in China's mobile payment market between its two biggest tech firms Tencent Holdings 0700.HK and Alibaba Group BABA.N is set to continue, Tencent's president said after the firm reported a better-than-expected 61 percent jump in quarterly net profit.

FILE PHOTO: A Tencent sign is seen during the fourth World Internet Conference in Wuzhen, Zhejiang province, China, December 4, 2017. REUTERS/Aly Song/File Photo

Asia’s second-most valuable listed company said on Wednesday net profit for the first quarter was 23.29 billion yuan ($3.66 billion), beating the average analysts’ estimate of 17.5 billion yuan.

Strong mobile gaming revenue and 7.585 billion yuan in investment gains helped buoy its gross profit margin to 50.4 percent, the first sequential quarterly increase since the second quarter of 2015.

Tencent has stepped up its investment activities over the past year, not only making deals in areas like gaming, entertainment and frontier technology, but also in retail and e-commerce - traditionally viewed as rival Alibaba’s turf.

In a battle for the world’s largest mobile payment and retail market, Tencent has splashed out billions forging alliances with new partners like Carrefour and subsidizing merchants to lure them onto its payment-to-messenger super app WeChat.

Bernstein analysts estimate Tencent’s merchant subsidy will be around $1 billion in 2018 while subsidies by Alibaba’s Ant Financial Services affiliate could be as high as $2-$4 billion.

WeChat had 1.04 billion users as of March and WeChat Pay is more popular than Alibaba’s Alipay in offline payment, though the latter is bigger in overall transaction volume.

“It is a matter of a fact that the competition is actually very heavy, there have been a lot of subsidies provided in the market by our market peers, and as a result we have to follow suit,” Tencent President Martin Lau said on an earnings call.

Tencent reported a 111 percent rise in “other” revenue in the quarter to 15.96 billion yuan on growth in payment solutions and cloud services. But the cost of revenue in that category doubled to 11.91 billion yuan, due to subsidies and promotional expenses.

“We do believe this level of subsidy will continue in the near-term future, because it is indeed a very big opportunity and we expect all industry participants should be investing heavily in this market,” Lau said.

He added that Tencent’s WeChat ecosystem gives it a unique position to take advantage of an enlarged market.

Total revenue rose 48 percent to 73.53 billion yuan, beating the 70.93 billion yuan average estimate.

Smartphone games revenue, the largest revenue contributor, was 21.7 billion yuan in the quarter. Its ‘Honour of Kings’ remains the highest grossing smartphone game in China’s iOS Top Grossing Chart, while new tactical tournament games like Fortnite are gaining popularity globally, Lau said.

The company, however, warned that delays in earning revenues from those games in China and heavy marketing expenses are expected to hit mobile games revenue in the short term.

Social networks revenues, including from Tencent’s video and music business, increased by 47 percent to 18 billion yuan. Tencent attributed the increase to growth in digital content services such as live broadcast, video streaming and in-game virtual item sales, and its Karaoke app WeSing.

Tencent’s PC games reported flat revenue of 14.1 billion yuan.

Tencent's shares have fluctuated sharply this year. They surged to a record high in January and then again in March to become Asia's most valuable listed company, temporarily overtaking Facebook Inc FB.O as the world's fifth-most valuable company. Since late March, the shares have seen a sharp reversal, losing about $87 billion in value to leave Tencent with a market capitalization of about $480 billion.

The drop was partly triggered by the company’s warning in March that margins may be hurt by its plan to invest “aggressively” this year into areas including video content acquisition and payment subsidy.

Reporting by Sijia Jiang; Editing by Muralikumar Anantharaman and Adrian Croft