Tencent Uses Games to Beat China Slowdown

In China’s slowing economy, billionaire Ma Huateng is finding growth by supplying cheap entertainment to the masses. Smartphone games for the billion users of the WeChat and QQ messaging applications and free streaming of HBO’s ‘Game of Thrones’ are expected to drive a 28 percent surge in sales for Ma’s Tencent Holdings Ltd. That’s four times faster than the rate of domestic economic expansion as China grows at the slowest pace in 25 years.

While WeChat was once just for instant messages, Ma has made the app part of everyday life for millions in China by adding the features of a microblog, social network and e-commerce platform. Along with streaming of HBO shows and NBA games, Tencent is finding content a durable source of revenue as it competes for Internet users with Alibaba Group Holding Ltd. and Baidu Inc. “The mobile gaming sector has been an area of fast growth,” said Michelle Ma, an analyst at Bloomberg Intelligence in Hong Kong. “Games are low-cost entertainment, so even in recessions people will continue to spend money on this sector.”


Shares of Tencent fell 1.6 percent to HK$152 in Hong Kong trade. The stock has surged 35 percent in 2015, compared with a 20 percent slump by Alibaba and a 12 percent drop for Baidu. Tencent briefly passed Alibaba in September to become Asia’s biggest Internet company by market value before falling back into second place last month. Based in the industrial city of Shenzhen, Tencent is the only one of China’s three Internet giants to have its shares traded in Asia. Baidu and Alibaba are listed in New York.
When it reports results Tuesday, Tencent is expected to post revenue of 25.4 billion yuan ($4 billion) in the three months ended September, according to analyst estimates. The projected jump is faster than a year earlier and would make it the only one of China’s three Internet giants to accelerate growth in the September quarter. Tencent net income will probably jump 32 percent to 7.5 billion yuan, according to estimates, as it invests in more games to build on its strength.

Beyond instant messages and video calls, WeChat works like a portal. By tapping on the ‘discover’ button at the bottom of the screen, users are brought to a page with games, shopping services and a function similar to Facebook. Tap on the ‘Me’ button, and customers find a digital wallet where they can invest their spare savings and transfer money to friends.

It’s the games that are delivering growth with attractions including battle title CQB. Already a shareholder in South Korea’s CJ Games Corp. and Activision Blizzard Inc., Tencent in April said it would invest $126 million in Glu Mobile Inc., the creator of an app featuring reality TV star Kim Kardashian as it tries to meet the market’s growing appetite for content. Tencent’s mobile games are free to download and play, with users buying skills and powers. “Tencent has great channels for distributing games with WeChat, QQ and its app store,” said Jeff Hao, a Hong Kong-based analyst at China Merchants Securities Holdings. “As a result, it’s also easier for Tencent to get better-quality games.”

While Tencent’s game success has made it less vulnerable to an advertising slowdown, it’s still working to boost revenue. That includes selling ads on WeChat, QQ and its video streaming sites. The company’s advertising sales almost doubled in the June quarter, and Tencent is building on that with ads linked to popular shows like The Voice of China and National Basketball Association games. WeChat has added more ad space in its “Moments” section, a Facebook-like feature where users post photos and status updates.

Tencent pays studios for the rights to stream programs online in China and gains revenue from advertising. The business model is popular in the country as subscription TV isn’t as widespread as in the U.S. and Europe. The company bolstered its content further on Friday, adding the exclusive online rights in China for the complete James Bond franchise from Metro-Goldwyn-Mayer Studios Inc.

Source: Bloomberg