Tencent to future-proof, but at a cost
Hong Kong — Naspers's Chinese associate Tencent says investments in content and technology will weigh on margins after Asia’s most valuable company posted quarterly profit that topped projections.
Plans by the Shenzhen-based company to keep spending on areas including artificial intelligence and video may weigh on short-term profitability, but it expects the investments will anchor long-term growth. Tencent reported net income almost doubled to 20.8-billion yuan ($3.3bn) in the three months ended December, beating the 16.6-billion yuan expected by analysts.
Tencent’s business revolves largely around its vast social networks WeChat and QQ, the twin platforms through which more than 1-billion people consume games, news and online entertainment while paying for a plethora of real-world services.
CEO Ma Huateng is now angling to grab a larger slice of an advertising pie dominated by Alibaba, while investing in new areas such as financial, retail and computing services.
"Tencent needs to invest in new business. It would help the company build a better ecosystem infrastructure to support growth, but it will hurt margins in the short term," said Benjamin Wu, an analyst at consultancy Pacific Epoch.
Tencent’s quarterly profit included gains of 7.9-billion yuan thanks mainly to the initial public offerings of Sea, Sogou and Yixin — just three of the 600 companies it has invested in.
Quarterly revenue rose 51% to 66.4-billion yuan but fell short of projections for 68.6-billion yuan. Tencent shares have gained 14% in 2018 and are among the world’s best performers over the past decade.
Revenue from the Value Added Services unit, which includes online games and messaging, climbed 37% while online advertising sales surged a much better 49%.
Costs, however, soared 72%, reflecting the expense of acquiring video and music content to keep users hooked as well as investment in new businesses such as cloud computing.
Executives told reporters on Wednesday that spending was crucial to the longer term. "That’s why for 2018 we are planning to step up our investments in a number of key areas," president Martin Lau said. "These investments may negatively affect our near-term profitability, but will generate long term value and new growth opportunities for us."
Lau said the Tencent Music business is suitable for its own initial public offering, while Ma said a listing of Tencent shares on a mainland exchange would be considered if policy conditions were viable.
After striking gold with Honour of Kings, Tencent developed two mobile versions of PlayerUnknown’s Battlegrounds, the world’s hottest personal computer title in 2017.
Since their January debut in China, the pair have given Tencent a much-needed boost in momentum, attracting more than 80-million players combined. The firm is in talks with regulators to introduce a desktop version of Battlegrounds.
Tencent is also moving swiftly into areas such as financial services, aiming to compete more directly with Ant Financial, the Alibaba affiliate that has dominated payments for years.
Tencent’s payments service was now No1 in China when measured by daily or monthly active users, Lau said.
Its Licaitong wealth management service had more than 300-billion yuan in assets as of January, while Weilidai, its nascent lending business, had outstanding loans of more than 100-billion yuan at the end of 2017.
"We are increasing our investment in areas including video, payment, cloud, artificial intelligence and smart retail," Ma said.