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Tencent revenue and profit surge past expectations

WeChat provider steps up rivalry with Alibaba as game segment continues to shine

Chinese internet powerhouse Tencent has many startup units attracting investors.   © Reuters

HONG KONG -- Tencent Holdings' net profit grew 69% on the year to 18 billion yuan ($2.72 billion) for the July-September quarter, the Chinese social messaging app provider and entertainment conglomerate reported Wednesday, easily topping analyst projections.

Boosted by robust growth in the core gaming business and online advertising segment, profit exceeded the 15.05 billion yuan average forecast of analysts polled by QUICK FactSet.

Revenue jumped 61% to 65.21 billion yuan, beating analysts' projection of 61.14 billion yuan. Popular titles in the game segment, including "Honour of Kings" for smartphones, underpinned the stellar growth. Online game revenue rose 48% to 26.84 billion yuan.

Tencent recorded robust growth in the core segment despite a July decision to limit play time for certain young users in response to complaints of addiction, putting to rest concerns over a possible slowdown.

The segment's outlook still sparkles. CCB International analyst Ronnie Ho expects Tencent to remain a leader in multiplayer online battle and shooter games, while intellectual property licensing in action and role-playing games continues to bring in profits.

Ho sees Tencent's well-established Weixin, WeChat and QQ messaging apps providing advantages to the company's gaming business. Tencent "can easily incorporate social networking features in all of its games, thereby significantly enhancing user engagement," he wrote in a recent report. Monthly active users of Weixin and WeChat totaled 980 million as of Sept. 30, up 15.8% from a year earlier.

A massive trove of user data and a strong balance sheet supported by core businesses enable Tencent to deploy into the field of artificial intelligence. Although the company was not the first in, Daiwa Capital Markets analyst John Choi believes that "it will be a strong contender for the upcoming AI competition in China."

Revenue from its online ad business, Tencent's other bread-and-butter segment, posted robust growth of 48% to 11.04 billion yuan for the July-September period.

Before the earnings announcement, Hong Kong-listed Tencent shares declined 1.29% to close at 383 Hong Kong dollars Wednesday.

As its core businesses continue to shine, the company has recently been accelerating spinoffs and initial public offerings of group members. On Wednesday, Tencent-backed online car retailer Yixin Group raised a total of about HK$6.77 billion ($867.5 million), with the upper end of the price range at HK$7.70 per share.

The IPO followed earlier spinoffs of online book arm China Literature and search engine Sougo. In addition, the market already expects an IPO of the company's music arm that could raise at least $1 billion next year.

Going forward, however, Tencent management hinted at a slowdown in spinoffs during a Wednesday conference call. For the "majority of our businesses which have been homegrown and organic, there is actually more reasons for them to stay together," President Martin Lau Chi Ping said.

Tencent has also been busy stepping up its competition with Alibaba Group Holding. China's mushrooming e-commerce sector is among the battlegrounds. Tencent, and its partner Wal-Mart teamed up ahead of the nation's biggest shopping day of Nov. 11, or Singles Day, to share customer data and fulfillment to challenge e-commerce king Alibaba.

Alibaba this month reported net profit of 17.4 billion yuan and revenue of 55.12 billion yuan for the quarter ended September. Both companies' stock prices have doubled since the start of the year.

Online payment services in Southeast Asia are another contested arena. Although Tencent did not break out a figure for this business, it did say revenue from "other businesses" grew 143% on the year, thanks mainly to payment-related and cloud services. Monthly offline payment volume increased 280%.

Lau said Wednesday that initial growth for payment business overseas would be "serving the Chinese users that are going increasingly abroad," which is similar to what Alibaba affiliate and Alipay mobile payment service provider Ant Financial has pledged.

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