Tencent Gains $18 Billion as Record Profit Eases Margin Fear

The logo of Tencent at the Global Mobile Internet Conference in Beijing. The company posted a huge rise in earnings. Kim Kyung-Hoon  Reuters

The logo of Tencent at the Global Mobile Internet Conference in Beijing. The company posted a huge rise in earnings. Kim Kyung-Hoon Reuters

Tencent continues to draw the lion's share of its business from gaming, while counting on advertising and finance via WeChat to drive future growth.

Tencent reported first-quarter earnings that topped analyst estimates, but investors are concerned about rising spending which could weigh on margins.

Profit was also helped by one-time gains of nearly 7.6 billion yuan from its investments in arenas like video and news. Capex jumped 200 percent to CNY 6.318 billion. Earlier Wednesday, Tencent shares were down 0.45% at HK$396.2. Analysts tracked by Thomson Reuters have a mean price target of 513.41 Hong Kong dollars, representing a more than 23 percent rise from Thursday's trading price.

But it adjusted earnings of 1.915 yuan, which is equal to 30 cents.

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Tencent said mobile game revenue hit 21.7 billion RMB ($3.4 billion) during the quarter, up 68 year-on-year. In a statement accompanying the earnings report, Tencent Chairman and CEO Ma Huateng said, "In the first quarter of 2018, we launched the popular tactical tournament mobile games and enhanced the capabilities of widely-used services such as our Weixin Mini Programs, deepening engagement across our social, games and media platforms".

But overall costs surged 51 percent. "We will continue to invest in improving our own products as well as enabling services for our partners, in order to fulfil our mission of enhancing the quality of life through Internet services".

With strong cashflows and a huge customer base in excess of one billion users, Tencent has been aggressively seeking out start-ups with good potential and boosting their chance of success by providing funding support as well as customer traffic. Tencent executives have signaled a willingness to sacrifice margins in favor of longer term growth in new businesses, though that would depend on growing and engaging a massive user base now primarily confined to China.

Revenue from PC games was flat compared to previous year, but analysts believe the comparison was tough with the 2017 first quarter, and overall its games business was strong. "Honour of Kings was a major contributor for mobile gaming revenue".

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