Tencent to boost AI after profit jumps on mobile games, WeChat

HONG KONG (Reuters) - Tencent Holdings Ltd 0700.HK, China's biggest gaming and social media firm by revenue, trumped forecasts to post its best-ever quarterly results, driven by higher income from smartphone games, payments and online advertising.

FILE PHOTO: WeChat mascots are displayed inside Tencent office at the TIT Creativity Industry Zone in Guangzhou, China May 9, 2017. REUTERS/Bobby Yip/File Photo

Looking ahead, Tencent said it plans to increase investment in payment services, cloud services and artificial intelligence, an area in which it is making inroads despite being a latecomer.

“We will be persistent but patient with our AI investment, because we believe it is a long-term initiative and we do not necessarily require our research to generate revenue directly in the short term,” said Tencent President Martin Lau.

All of Tencent’s existing businesses would benefit from its AI research, he added, in particular its performance advertisement business, information-based services and fintech.

The most valuable firm listed in Asia - which is riding a wave of success stemming from the popularity of its social-network based mobile game Honour of Kings - beat analyst forecasts to post a profit of 18.23 billion yuan ($2.72 billion) in the second quarter, up 70 percent from a year ago, the biggest such rise in seven years.

Tencent’s revenue, which has been scaling new highs every quarter since 2007, surged 59 percent to 56.6 billion yuan.

The popularity of the fantasy role-playing game Honour of Kings, based on Chinese historical characters, helped Tencent’s smartphone games revenue climb 54 percent to 14.8 billion yuan, surpassing that from PC games for the first time.

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Honour of Kings is the top-grossing mobile game in the world. It has become so popular that Tencent had to introduce curbs on play time last month amid reports of serious addiction among children.

While the Chinese tech giant noted “exceptional strength” from PC games including League of Legends, it cautioned revenue growth rates from the sector were expected to slow down.

Monthly active users of WeChat, a messaging-to-payment superapp that is at the core of Tencent’s mobile ecosystem and accounts for about a third of the time spent online by Chinese mobile users, rose to a new record of 963 million.

That helped Tencent report big jumps in advertising and payment revenue related to the app.

WeChat's embedded payment function WeChat Pay dominates China's digital payment space together with Alibaba's BABA.N Alipay, and both have been fast turning the country into a cashless society.

Tencent said its payment business grew in the quarter on offline merchant growth thanks to cooperation with partners including Meituan-Dianping.

But Lau said intensifying market competition will prompt growing investment into its payment business, adding it is “not the target” to make a profit from it, which the company considers an “infrastructure” to its business.

Revenue from social networks, driven by live broadcast, video and music, surged 51 percent to 12.94 billion yuan over the period.

Tencent’s shares, which have soared 70 percent this year, closed at HK$323 Wednesday before the results, giving it a market value of $387 billion.

“We think there is still a lot of growth potential from Tencent’s cloud and payment business,” said Bocom International analyst Connie Gu, who raised the price target for the stock to HK$373 last week.

Earlier on Wednesday, state-owned China Unicom said it was raising $11.7 billion from new investors including Alibaba Group BABA.N and Tencent, as part of Beijing's push for state-owned enterprises to be revitalised with private capital.

Reporting by Sijia Jiang; Editing by Himani Sarkar and David Evans