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Tencent misses estimates

Technology

Hong Kong - Tencent Holdings posted fourth-quarter profit that missed analysts’ estimates amid a surge in costs and rising competition in the mobile gaming market.

Net income rose 47 percent to 10.5 billion yuan ($1.5 billion) in the three months ended December, the Shenzhen-based company said on Wednesday. That compares with the 11 billion-yuan average of analyst estimates compiled by Bloomberg.

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A sign of Tencent is seen during the third annual World Internet Conference in Wuzhen town of Jiaxing

Tencent is competing with companies including Netease for users as more people shift toward mobile games, which generate lower margins and have shorter lifespans than desktop titles. As its home market gets saturated, the Shenzhen, China-based company needs to find new sources of growth by delivering more hits, especially with its WeChat messaging service having a tough time expanding overseas.

“Mobile gaming revenue likely softened in the fourth quarter,” Shi Jialong, a Hong Kong-based analyst at Nomura International, said before the earnings. Shi attributed the weakening to the company’s “intentional slowdown in mobile game monetization.”

Cost of revenues increased by 60 percent to 20.2 billion yuan from a year earlier. South Africa's Naspers owns about a third of the company.

Tencent is revving up its battle with Alibaba Group Holding in advertising as well, adding more space to lure brands onto WeChat. Revenue rose 44 percent to 43.9 billion yuan, compared with estimates for 44 billion yuan.

Shares of Tencent fell 1.6 percent to HK$225.20 in Hong Kong before its earnings were announced. The stock has gained 19 percent this year, compared with a 20 percent gain for New York-listed rival Alibaba.

Revenue from the Value Added Services unit, which includes online games and messaging, jumped 27 percent to 29.2 billion yuan in the fourth quarter, while online advertising sales climbed 45 percent to 8.3 billion yuan.

WeChat had 889.3 million monthly active users at the end of the quarter, while the smart-device version of QQ had 652.5 million.

Read also: Tencent stock shows depth of China gloom

To diversify its revenue, the company is buying content from anime and comics to novels to convert into movies and mobile games.

While games have underpinned Tencent’s rise, it risks getting drawn into a political spat between China and South Korea. The company hosts games from South Korean developers and could run afoul of a Chinese boycott of goods from its Asian neighbor, retaliation for hosting a controversial US missile-defense system. The approval process for new games could now take much longer, said Nomura’s Shi.

China’s gaming revenue market could grow 43 percent to $12.85 billion by 2020 from last year, according to PricewaterhouseCoopers.

WeChat’s new “mini programs” potentially pits the messaging service against Android and Apple Inc. app stores. The new concept of slimmed-down, embedded apps allows users to access a hodgepodge of services from shopping to ride-hailing without the need to download full versions of apps.

Tencent is investing in content to keep users on its platforms, adding new games and also making inroads into Hollywood by funding blockbusters including “Kong: Skull Island” and “Warcraft.” It’s sitting atop a plethora of intellectual property for anime and online novels that are distributed via its websites. The company has aspirations to create a Marvel-like movie empire, as it competes with Alibaba for user eye-balls.

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