HONG KONG/GUANGZHOU -- China's leading social media and gaming company, Tencent Holdings, reported worse-than-expected revenue growth for the April-June quarter partly on the rise of ByteDance, the world's most valuable startup, whose viral short-video app TikTok gobbled up a sizable chunk of online advertising.
In its earnings filed Wednesday, Tencent said net profit grew 35% on the year to 24.1 billion yuan ($3.4 billion), beating the average forecast of 20.7 billion yuan. The slowdown in online ads, however, cast a cloud on the company's strategy going forward.
Revenue from online advertising rose 16% on the year, down from a 39% gain in the same quarter of 2018. The company cited the "increased supply of short video advertising inventories" as a factor in the slowdown. The sector accounted for nearly 20% of Tencent's total revenue.
ByteDance's short-video app TikTok has become the darling of advertisers thanks to its huge user base. In January, TikTok surpassed Facebook and Instagram in the number of downloads, according to app tracker Sensor Tower.
"We expect the negative impact from the current business environment will persist in the second half of 2019," Tencent said in its statement.
Daiwa analysts agreed with these concerns, warning in an Aug. 7 research note that the "advertising outlook remains challenging" for Tencent as "increased ad inventory leads to a competitive pricing landscape and advertising budgets from advertisers are likely to remain cautious on macro concerns."
Tencent logged total revenue of 88.8 billion yuan ($12.6 billion). Despite increasing 21% on the year, it trailed the consensus estimate of 93.4 billion yuan, according to data provider Refinitiv.
Selling ad space on platforms such as its WeChat -- its chat application boasting 1.1 billion users, mainly in China -- serves as a key piece of Tencent's strategy to accelerate its overseas expansion with entertainment investments funded by domestic earnings. Tencent's plans for its second front abroad could suffer if the trade war puts further pressure on the Chinese economy.
The company is in talks to buy a 10% stake in Universal Music Group for 3 billion euros ($3.36 billion), with a potential future increase to 20%, according to media reports this month. The Vivendi-owned music label's roster features the likes of Irish rock band U2 and American pop star Lady Gaga.
Tencent also is pursuing investments in other entertainment areas such as film and game development. It bought a substantial stake last year in U.S.-based Skydance Media, a producer of movies and virtual reality games. Skydance is co-producing a "Top Gun" sequel that Tencent is helping to fund via subsidiary Tencent Pictures.
More than 40% of Tencent's investments last year were in entertainment companies, roughly double the share from five years earlier, an analysis of data from Chinese research firm ITjuzi shows.
This marks a shift in the company's overseas strategy. The Shenzhen-based company previously hoped to use WeChat to gain a foothold abroad as well. But it has struggled to compete with established rivals such as WhatsApp and Line.
Tencent's online game sales rebounded to 27.3 billion yuan -- accounting for roughly 31% of revenue in the quarter -- thanks largely to new approvals by Beijing after a freeze on game licenses during most of last year.
China's No. 1 game publisher said it launched 10 new titles in the April-June period, compared with only one in the previous quarter.
JD.com, China's second-largest online retailer, also holds a pessimistic view of the country's online ad sales. Tencent is an investor in the retailer.
"Because of the overall macro environment, the Chinese ad market is under great pressure," Xu Lei, the chief executive of JD Retail, told analysts Tuesday.