Tencent stuns with 1st profit drop in at least a decade

Tencent Holdings Ltd. joined the ranks of Facebook Inc. by reporting shockingly poor quarterly numbers, underscoring how tech superstars that led the market to new heights are showing signs of strain.

Tencent surprised investors with its first profit drop in at least a decade – a consequence of a freeze on game approvals in China that smothered its pipeline. That puts more pressure on a company that has lost more than USD160 billion of market value since its January peak. The company’s German-traded shares plunged as much as 10 percent.

The poor result punctuates an abrupt about-face in sentiment this year as Beijing chilled the world’s largest gaming arena. The Shenzhen-based company relies on new content to draw and keep users on WeChat, via which it sells in-game items and advertising to a billion-plus users. A regulatory freeze and this week’s removal of hit game Monster Hunter: World is hampering that effort, spooking investors long accustomed to Tencent’s favored position as one of China’s leading corporate lights.

Net income fell 2 percent to 17.9 billion yuan ($2.6 billion) in the three months ended June, the Shenzhen-based company said. That’s well short of the 19.3 billion-yuan average of analysts’ estimates and reflects fading allure of older titles, increased spending and fewer investment gains. Mobile gaming revenue dropped 19 percent from the first quarter.

“The results were really bad,” said Benjamin Wu, an analyst at Shanghai-based consultancy Pacific Epoch. “The fact that Monster Hunter got taken down shows that even Tencent isn’t immune from regulatory crackdowns.”

Shares of Naspers Ltd., the biggest investor in Tencent and considered a proxy for the stock, fell 10 percent in Johannesburg.

China is said to have halted new game approvals and this week forced the pulling of the Monster Hunter game just days after its debut.

China may resume approvals around September, Wu said. Even if the process starts, it typically takes two to three months to work its way through, signaling potential weakness in the third quarter for companies like Tencent. Bloomberg