An avatar is displayed in an arranged photograph of the Honour of Kings mobile game, developed by Tencent Holdings Ltd., in Hong Kong, China. (Photographer: Justin Chin/Bloomberg)

Tencent Posts Blowout Quarter With Fastest Growth in 7 Years

(Bloomberg) -- Tencent Holdings Ltd. is defying the law of large numbers, posting accelerating revenue growth and topping the most optimistic of analyst estimates.

The owner of WeChat, the social network that is nearly ubiquitous in China, reported a 61 percent rise in third-quarter sales. Fueled by advertising and hit game Honour of Kings, the growth was the fastest since 2010, when revenue was a mere one-fourteenth of its current level. 

By getting WeChat onto almost a billion smartphones in China, Tencent has leveraged the instant message service into an entertainment and gaming platform that is driving advertising sales. Although the Shenzhen-based company remains largely absent overseas, it’s built a 12 percent stake in Snapchat-owner Snap Inc. and is exploring new sources of growth in the cloud, financial services, movies and music. 

“We don’t see any signs of slow down or deterioration for next quarter or 2018," said Naoshi Nema, an analyst at Cantor Fitzgerald LP in Hong Kong. “Mobile games growth is strong and the company is hitting pay dirt in areas of payments, cloud and on-demand video subscription.”

Tencent Posts Blowout Quarter With Fastest Growth in 7 Years

Sales for the quarter were 65.2 billion yuan ($9.8 billion), compared to analyst expectations for 61 billion yuan. Net income surged 69 percent to 18 billion yuan, also blowing past projections for 15.8 billion yuan. Tencent’s shares closed 1.3 percent lower, before earnings were announced. Naspers Ltd., a major stockholder in the company, climbed as much as 4.1 percent to a record high in Johannesburg.

WeChat had 980 million monthly active users, up almost 16 percent from the previous year and now sending 38 billion messages daily. But the mobile version of QQ, Tencent’s other mainstay social network, had 2.5 percent fewer users at the end of the quarter.

The success of Honour of Kings helped expand smartphone gaming revenue by 84 percent in the period. While the game was recently dethroned from the top of China’s iOS store, Tencent has a full pipeline of titles for 2018 that includes several from South Korean developers that were held back amid political tensions with China.

The company’s first two survival games, Glorious Mission and Crossfire, have each had more than 20 million pre-registrations with the Deserted Island title to launch this month.

“Games will be still be a key revenue contributor going forward,” said Benjamin Wu, an analyst at Shanghai-based consultancy Pacific Epoch. “Its key title Honour of Kings is looking to sustain its gross revenue to the next year.”

Investors bet earlier in 2017 that some of the company’s boldest investments would finally pan out, adding about $230 billion of market value and creating one of the world’s most richly valued companies.

Tencent Posts Blowout Quarter With Fastest Growth in 7 Years

A still-nascent advertising and finance business on WeChat has also expanded at a rapid clip, furthering its ambition of eventually becoming an powerhouse along the lines of Alibaba Group Holding Ltd. or Facebook Inc. Online advertising sales grew 48 percent in the quarter.

For the longer term, it’s investing billions of dollars in artificial intelligence research, both to better target marketing as well as underpin future product categories. Tencent is said to have developed an autonomous driving system, among other areas it’s delving into. 

As Tencent takes more steps toward creating a more global business, its financial muscle is helping it withstand domestic competition from the likes of Jinri Toutiao and help it retain pole position in Chinese gaming and social media. It’s also plowing money into music, e-books and video streaming -- the content it needs to keep users hooked on its WeChat social media and messaging service.

While it’s unclear what it plans with its chunk of Snap, the acquisition comes after a failed attempt to pick up WhatsApp and may mark a renewed effort to feel out markets beyond its home turf. Tencent has said the pair will share experiences and expertise in social networking, and cooperate on game distribution.

“Over time, we’ll see whether we can do something more strategic with them,” President Martin Lau said in a conference call.

On the deals front, the stellar debut of e-books unit China Literature Ltd. may not immediately presage more mega spinoffs. While Tencent is said to be prepping its music arm for an IPO that could raise at least $1 billion next year, Lau sees value in keeping many of the businesses integrated with the company.

“I don’t think spinoffs are going to be a norm for us going forward,” Lau said.

©2017 Bloomberg L.P.