Bloomberg News

Tencent May Slow Investments as Costs Erode Earnings

March 15, 2012

Martin Lau, president of Tencent Holdings Ltd. Photographer: Nelson Ching/Bloomberg

Martin Lau, president of Tencent Holdings Ltd. Photographer: Nelson Ching/Bloomberg

Tencent Holdings Ltd. (700), China’s biggest Internet company, may make fewer investments this year after costs from earlier acquisitions eroded earnings from online games and social networking.

“The pace of investments in the future may be slower,” President Martin Lau told reporters at a briefing in Hong Kong yesterday. Tencent spent more than 5 billion yuan ($790 million) on “several dozen” equity investments in 2011, and will seek to complete “at least 10” deals this year, Lau said.

Tencent posted its weakest full-year profit growth since 2005 after booking costs from purchases such as Los Angeles- based Riot Games Inc. The Chinese company also bought stakes in Internet travel operator eLong Inc. and security software vendor Kingsoft Corp. (3888) to diversify from online games.

“They will need to integrate some of the assets they acquired,” said Kevin Tam, who rates Tencent shares buy at Core Pacific-Yamaichi International in Hong Kong. “It makes sense for the company to slow down and take stock.”

Fourth-quarter profit rose 15 percent to 2.54 billion yuan, Shenzhen-based Tencent said in a statement to the Hong Kong stock exchange yesterday. That was in line with the 2.55 billion-yuan average of nine analyst estimates compiled by Bloomberg. Still, the 27 percent increase in full-year profit in 2011 was slower than 2010’s 56 percent.

Tencent rose 4.1 percent to HK$208.2 in Hong Kong, the highest closing share price since July 18, making it the best- performer in the benchmark Hang Seng Index today. The stock has gained 34 percent this year, outperforming Chinese Internet rivals including Baidu Inc. (BIDU) and NetEase.com Inc. (NTES)

Cautious Spending

“We will be very careful in controlling the pace of our investments, and we want to use our money more smartly,” Chief Executive Officer Pony Ma said at the briefing. Still, it’s important for Tencent to make investments for the long-term rather than focus on “short-term profit,” he said.

Fourth-quarter sales of Internet value-added services, including online games and social-networking products, rose 46 percent on year to 6.4 billion yuan, Tencent said. Online advertising sales increased 54 percent to 598 million yuan.

“The ‘League of Legends’ game was a new blockbuster for Tencent,” Jonathan Chan, who rates Tencent shares outperform at CCB International Securities in Hong Kong, said before the earnings.

In February 2011, Tencent paid $231.5 million in cash, in addition to stock options, to buy control of Riot Games, developer of “League of Legends.” The acquisition contributed to an 86 percent surge in full-year general and administrative expenses, Tencent said.

QQ

In the fourth quarter, Tencent added 9.3 million active user accounts on QQ, China’s most-popular instant-messaging service, for a total of 721 million at year-end.

About 430 million people use QQ, according to an estimate by OSK Securities analyst Billy Leung in January. Tencent has said QQ users typically have more than one account.

Tencent seeks to derive a greater proportion of its income from online advertising, Lau said.

“At the moment, 90 percent of our revenue comes from fees, with 10 percent from advertising, and in the long term, there needs to be a shift,” Lau said. By contrast, Facebook Inc. (FB), the world’s biggest social-networking website, gets most of its income from advertising, he said.

Tencent will offer a new “performance-based” advertising system this year, and will seek to increase revenue from its search-engine, Lau said.

The company will pay a final dividend of 75 Hong Kong cents a share.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.


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