Tencent Results Top Estimates After Scoring Breakout Hits

(Bloomberg) -- Tencent Holdings Ltd.’s investments in blockbuster video and gaming content are paying off -- big-time.

China’s largest internet company posted record quarterly sales and profit that topped all analysts’ estimates as blockbuster titles including Honour of Kings drove a billion-plus users on WeChat and QQ to spend on game items. Chairman Pony Ma’s strategy of stockpiling rights to hit anime and novels and developing shows in-house is transforming the company into a hybrid Marvel Studios-Netflix style content factory.

Soaring growth at Tencent’s mobile gaming and advertisement units is buying the company time to develop new channels of revenue in finance and cloud, and bankrolling a foray into Hollywood. After backing “Kong: Skull Island,” the company is helping finance the upcoming summer tent-pole “Wonder Woman.” A market value of about $320 billion underscores how China’s online titans, including Alibaba Group Holding Ltd., are outstripping traditional state sectors and defying a slowdown in the world’s second-largest economy.

“It was a strong set of results,” said Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong. “Tencent’s mobile gaming business was the main contributor, especially Honour of Kings.”

Thomas Chong, an analyst at BOC International, estimates that Honour of Kings will contribute more than 50 percent of Tencent’s smartphone game revenue this year, and that it recorded monthly gross revenue of 2.8 billion to 3 billion yuan in April.

Revenue climbed to 49.6 billion yuan ($7.2 billion) in the three months ended March, the Shenzhen-based company said on Wednesday, surpassing the 46.4 billion yuan analysts projected on average. Net income climbed to 14.5 billion yuan, compared with the 13 billion yuan projected.

The results included “net other gains” of 3.2 billion yuan, six times a year earlier, which was mainly from disposals and dividend income, it said.

Shares of Tencent rose 1.2 percent higher to HK$262.80, on pace for a record close. The stock has gained 39 percent this year, compared with a 37 percent rise for New York-listed rival Alibaba Group Holding Ltd.

Shifting from its old strategy of relying on third-party content, Tencent has poured money into developing its own videos, a strategy that has propelled Netflix Inc. Its Chinese TV drama “Candle in the Tomb” grossed about 2.5 billion views as of January before the show’s finale, according to Tencent’s news portal QQ.com.

In games, Tencent rode a strong showing from Honour of Kings. Self-developed, the hit battle title is in the same vein as the world’s most popular desktop title League of Legends -- also owned by Tencent. It topped both revenue and downloads in Apple Inc.’s iOS store in March, according to App Annie. Monthly active users reached 167.7 million in the quarter, Alan Hellawell, an analyst at Deutsche Bank AG, estimates.

The Chinese company’s pipeline looked full for this quarter as well. It unveiled another 19 mobile titles in April including the much-anticipated JX Online III, according to JPMorgan Chase & Co. analyst Alex Yao. A majority of those were adapted from hit novels, shows or anime in hopes of appealing to an established fan base. In the longer term, Tencent intends to introduce its in-house games to a broader global audience.

“We’ll continue to build that presence, through investments and acquisitions,” President Martin Lau told analysts on a post-earnings conference call. “At the same time, we’re going to launch our self-developed games over time into the overseas market.”

The company’s now also backing Twitch-like streaming sites including Wuhan Douyu Network Technology Co. and accelerating investments in Hollywood films.

While Tencent remains largely reliant on in-game spending, it’s been growing an online ad business on the back of China’s largest pool of social media users. Revenue from that business increased 47 percent to 6.9 billion yuan in the first quarter.

WeChat had 937.8 million monthly active users and the mobile version of QQ had 678 million users at the end of the quarter. Revenue from Value Added Services, which includes online games and messaging, soared 41 percent to 35.1 billion yuan. Of that total, online game revenue grew 34 percent to 22.8 billion yuan.

From January, WeChat’s “mini programs” began letting users access third-party services such as bike-sharing without the need to download full versions of individual apps. While nascent, that platform has the potential to side-step Apple or Android app stores and signals Tencent’s longer-term ambition to keep users within its own mobile environment. WeChat could eventually integrate mini-programs into a fuller-fledged app store that sits on top of native operating systems such as iOS or Android, according to Morgan Stanley analyst Grace Chen.

“The results continue to reflect our view that Tencent is in an investment phase which could imply steady topline beats but headwinds to margins,” Bhavtosh Vajpayee and Bill Liu, analysts at Sanford C. Bernstein, said in a report after the results. “Investments in new businesses are all in order, and well justified, which is why we would refrain from worrying too much on margins post this report.”