Tencent net up, but sales hit new low amid clamp

Chinese gaming and social media giant Tencent Holdings (0700) posted a better-than-expected 3 percent rise in third-quarter profit to 39.5 billion yuan (HK$48.14 billion), but its sales growth decelerated for a sixth straight quarter and reached the slowest pace since it went public in 2004.

Tencent's sales rose 13 percent to 142.4 billion yuan for the three months ended September, missing the 145.4 billion yuan average forecast, according to a filing.

Sales from mobile games rose 9 percent, the owner of games such as "Honor of Kings" and "PUBG mobile" said in a statement. In terms of regions, domestic gaming revenue rose 5 percent, lagging the 20 percent jump in international gaming revenue.

Tencent said minors accounted for 0.7 percent of domestic games time in September this year, down from 6.4 percent in September 2020.

Online advertising rose a slower-than-expected 5 percent, in part because of weakness in the education, insurance and gaming sectors, Tencent said in its filing. It added that advertising pricing could remain soft for several quarters "due to macro challenges and regulations affecting certain key advertising sectors."

Tencent's third-quarter results - the first among China's largest technology giants - offer a snapshot of the far-reaching impact of Beijing's campaign at its height. The company's outsized influence in the world's No. 2 economy has left it vulnerable as government scrutiny quickly engulfed everything from finance to education and online entertainment. Among the deadliest blows were July's tutoring purge that decimated a key source of ad revenue and a cap on kids' gaming time announced the following month.

"Pressure on Tencent's advertising growth may persist for the next few quarters," said Matthew Kanterman, Bloomberg Intelligence senior analyst. "Although online game sales held up well despite regulatory headwinds and new game releases add promise to 4Q and 2022 trends, softening ad trends could lead to a further downgrade to growth expectations."

For now, Tencent's enduring hits like Honor of Kings continue to be its biggest gaming cash cows as it seeks new growth drivers. Fully-owned Riot Games may offer the greatest potential: its long-anticipated League of Legends mobile game finally debuted in China last month and the franchise's e-sports tournament and new anime series drew hundreds of millions of views for Tencent and its affiliates over the past weekend.