Tencent to step up global games expansion after posting 13 per cent decline in quarterly profit

Iris Deng and Celia Chen iris.deng@scmp.com; celia.chen@scmp.com

Internet giant Tencent Holdings aims to step up international expansion through its growing video games empire, which could receive a boost with the roll-out of ultra-fast 5G mobile services that enable more advanced applications.

Tencent, which already runs the world's biggest video games business by revenue, revealed plans to strengthen its presence in international markets, after the Hong Kong-listed company reported on Wednesday lower-than-expected earnings in the third quarter.

Martin Lau Chi-ping, president of Tencent, said at a conference call with analysts after the market closed that the company will sharpen its focus "on incubating our own ideas that are suitable for global audiences and broadening our partnership with international IP (intellectual property) owners".

In addition, Tencent will pursue localisation of video games for multiple regional markets, Lau said. While the Shenzhen-based company has succeeded in pioneering this strategy, he said international markets still represent a small percentage of its video games business.

Tencent Holdings operates the world's biggest video games business by revenue. Photo: Reuters alt=Tencent Holdings operates the world's biggest video games business by revenue. Photo: Reuters

The latest example of Tencent's market savvy in video games that Lau cited is Call of Duty Mobile, which had been downloaded 148 million times in its first month of release, making it the second most downloaded mobile game in its debut month after Pokemon Go, according app analytics firm Sensor Tower.

What sets Tencent apart from other major Chinese games companies with international ambitions, such as NetEase, are its platforms for interacting with gamers and other consumers " QQ and WeChat, which also serve as distribution channels for games. Established in 1999 as an instant-messaging software service, QQ has evolved to also provide social games, music, video, comics, microblogging, online shopping and mobile payments. There were 731 million monthly active users on QQ at the end of September.

WeChat, marketed as Weixin on the mainland, started as a mobile messaging app in 2011. It has since become a multipurpose service used as social network, mobile payments platform, digital marketing vehicle, business communications, news feed and search site, games provider and local services that include booking transport and paying utilities. It had 1.15 billion monthly active users in the same period.

Tencent has been increasing its efforts to develop a war chest of valuable entertainment content, especially for mobile games in the world's largest smartphone market. The company already owns significant stakes in US-based developers Riot Games, Epic Games, Glu Mobile and Activision Blizzard, as well as South Korean firm CJ Games and Japanese company Aiming. It also spent US$8.6 billion to take over Finnish mobile game developer Supercell in 2016.

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Lau said the advent of 5G mobile services is "an interesting opportunity" to enable more bandwidth-consuming services and other new applications, benefiting Tencent's growing entertainment content.

With peak data rates up to 100 times faster than what current 4G networks provide, 5G has been held out as "the connective tissue" for the Internet of Things, autonomous cars, smart cities and other new mobile applications, establishing the backbone for the industrial internet.

The global video games market is projected to reach US$152.1 billion at the end of this year, led by the US and China, according to research firm Newzoo.

Tencent reported on Wednesday a net profit of 20.4 billion yuan (US$2.9 billion) in the quarter ended September 30, down from 23.3 billion yuan in the same period a year ago, as media advertising fell 28 per cent to 3.7 billion yuan. That was below the 23.5 billion yuan average from analysts' estimates compiled by Bloomberg.

Total revenue increased 21 per cent to 97.2 billion yuan, up from 80.6 billion yuan a year earlier, but this was still below analysts' consensus estimate of 99 billion yuan.

Tencent chairman and chief executive Pony Ma Huateng, however, saw "sustained healthy growth rates" in the company's operating and financial metrics. "Notably, our fintech and business services and advertising segment revenues each increased at double-digit percentage rates from the second quarter, thanks to rising user activity and improved advertising technology," Ma said in a statement.

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That showed "the strength of our new businesses" as well as the diversity of Tencent's operations, he said. Tencent's shares slipped nearly 1 per cent to close at HK$327.40 on Wednesday.

The Shenzhen-based company's latest quarterly results also showed that its video games business was recovering after a regulatory crackdown on internet content and initiatives to stem gaming addiction, which included suspending the licensing process for new games for nine months last year. Licensing was restarted in December.

Total online games revenue increased 11 per cent to 28.6 billion yuan, but revenue from personal computer games decreased 7 per cent to 11.5 billion yuan. Smartphone games, by comparison, increased revenue by 25 per cent to 24.3 billion yuan.

Apart from domestic hits Honour of Kings and Peacekeeper Elite, Tencent continued to score big outside China with PUBG Mobile, its smartphone version of popular battle royale game PlayerUnknown's Battlegrounds. First released for iOS and Android users last year, PUBG Mobile was the second most downloaded mobile game worldwide in the third quarter, with more than 94 million new installations, according to apps analytics firm Sensor Tower.

In July, Shenzhen-based Tencent announced plans to expand into the gaming hardware business through a collaboration with US semiconductor giant Qualcomm.

Tencent, operator of WeChat, saw its social networks revenue rise 21 per cent in the third quarter to about 22 billion yuan. This was mainly driven by greater contributions from digital content services, such as live streaming, streaming video subscriptions and music streaming services. Total monthly active users on WeChat, marketed as Weixin on the mainland, reached 1.15 billion.

The company's fintech and business services revenue grew 36 per cent to 26.7 billion yuan, bolstered by commercial payments in terms of increased daily active consumers and number of transactions. It also credited wider cloud computing services adoption in different industries.

Revenue from online advertising rose 13 per cent to 18.4 billion yuan on the back of growth from Weixin Moments. The decrease in media advertising revenue was caused by weakness in platforms like Tencent Video, which was affected by a slowing economic environment and unpredictability in scheduling major content releases.

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This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

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