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Tencent loses steam as new growth engines struggle to take off

Asia's once-most-valuable tech company suffers steepest profit drop in 14 years

Tencent CEO Pony Ma Huateng attends a news conference to announce the company's 2018 results in Hong Kong on March 21.   © AP

HONG KONG -- Tencent Holdings, one of Asia's biggest valuable technology companies, has suffered its steepest decline in quarterly profit since 2005, and analysts say its troubles are far from over.

The Hong Kong-listed social media and video game developer reported Thursday that its net profit plunged 32% on the year to 14.23 billion yuan ($2.12 billion) during the fourth quarter of 2018.

That figure is well below the forecasts of analysts surveyed by Reuters, which predicted a 13% decline to 18.1 billion yuan.

Revenue increased 28% from a year ago to 84.9 billion yuan thanks to strong growth in its advertising business. Tencent attributed the profit drop chiefly to noncash expenses from raising capital at a subsidiary. But apart from such one-time factors, analysts say the company has also faced persistent challenges.

"Since China's gaming market has matured and demand for online advertising has cooled down... Tencent's growth has reached a plateau," said Martin Bao, an analyst with ICBC International in Hong Kong. "Tencent's business simply cannot grow as rapidly as it used to."

Pei Pei, an analyst at Sinolink Securities who recently downgraded Tencent's shares, agreed.

"Tencent's core business will be under pressure in 2019, " Pei warned investors in a research note published before the earnings report, noting Chinese authorities greater scrutiny over video games and sluggish demand for online ads amid China's economic slowdown.

Revenue from Tencent's online games was nearly flat at 24.2 billion yuan despite the gaming license freeze. Online advertising revenue grew 38% to 17.03 billion yuan. But analysts say this improvement is insufficient to turn the tide.

Tencent's executives are aware of the challenges ahead. While saying the company retains "confidence" in the gaming business, "in the short term, we have to bear with regulatory difficulties and social issues," Tencent President Martin Lau said at a news conference Thursday in Hong Kong.

Chinese regulators in December ended a nine-month freeze on new video game licenses, but Tencent has yet to receive Beijing's approval for two potentially lucrative titles: "Fortnite" and "PUBG Mobile."

"Since there is a backlog in approval, there will be some impacts on the industry growth," Lau said, adding that Tencent has "several dozens more games" in the pipeline waiting for approval.

Nonetheless, the company tried to downplay market concerns. "Last year, whether it is advertising, payment, or cloud, they were developing pretty well. Our revenue structure is very diverse now," Lau said. Indeed, revenue from online gaming made up only 29% of Tencent's revenues in the fourth quarter, a significant reduction from the second quarter of 2018, when its revenue contribution was around 34%.

But online games and advertising still hold the lion's share of Tencent's revenue. Meanwhile, new businesses such as cloud services and artificial intelligence-powered smart solutions may take time to bear fruit.

In October, Tencent announced its first business restructuring plan in six years, seeking a second growth engine from helping industries digitize and smarten up their operations. However, "in terms of revenue, we will have to take a long view," Pony Ma Huateng, the company's founder and CEO, said at the news conference.

Tencent also faces tougher competition from other Chinese technology giants such as Alibaba Group Holding, which also eyes a slice of China's multibillion-dollar cloud computing market.

Lau confirmed reports that Tencent has shaken up its management ranks, replacing 10% of executives with fresh faces, although he did not elaborate on the reasons for the move or the number of employees affected.

Tencent shares dropped 1.89% to HK$363 at aftermarket trading in Hong Kong on Thursday following the disappointing results.

The company's investors have been taking a roller-coaster ride since early 2018. In March last year, Naspers cut its stake in Tencent by as much as 2%, selling shares of Asia's once-most-valuable company for the first time in 17 years.

The move by Tencent's biggest shareholder unnerved the market, driving the share price down as much as 7.8% that day, even though the South Africa-based publisher said it will not sell more shares in the next three years.

To stabilize its share price, Tencent has bought back shares totaling more than HK$800 million ($102 million) since September through to Oct. 10, according to stock exchange filings.

While Tencent's stock has rebounded 33% from an all-time low on Oct. 30, it is still 22% below the all-time high reached last January.

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