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Tencent Logs $6 Billion Half Year Profit but Games Slowdown Hits Revenues

Chinese digital giant Tencent booked $6.22 billion in profit during the first half of 2018, but revenues from its signature games unit have been hit by delayed releases and changing user patterns.

In the second quarter ending in June, Tencent registered $3.3 billion in profit, a 26% increase from the same period last year. Total revenue for the quarter was up by 30% to $11.1 billion, fueling a 39% increase across the first half of the year to $22.2 billion.

But compared to the first quarter, the company’s net profit in the second quarter dropped from RMB23.9 billion to RMB18.6 billion, a fall of 22%. That sent the company’s shares diving 8% in over-the-counter trading in New York.

Tencent said that smartphone games revenues were up 19% in the second quarter year-on-year, but they dropped by 19% compared to the first quarter. PC games were down 5% year-on-year, and 8% compared to the previous quarter.

The company’s gaming woes increased this week when its WeGame platform was ordered by Chinese regulators Monday to withdraw its newly released title “Monster Hunter: World.” The move worsened already-negative investor sentiment against tech stocks and against Chinese companies in the past couple of months. Tencent shares, which are listed in Hong Kong, have fallen 19% from HK$411.8 three months ago to HK$336 at the close of business Wednesday.

On a conference call with analysts following Wednesday’s earnings statement, Tencent management acknowledged an issue with regulators, but said it was an industry-wide problem and not specific to Tencent. Games approved before the end of March can be released, but not necessarily in all formats or monetizable versions.

Tencent CEO Martin Lau said regulators were aware of the problem and had opened up a “green channel” allowing a month-long test release for a new game. Lau said this showed the regulators’ goodwill. “We do not believe this is a question of whether [things will improve] but when,” he said. But he added that he had “no visibility” about when that would be.

Lau said that “games fundamentals are as strong as ever,” but admitted that his biggest game could not get onto the market.

There was better performance by the company’s digital content activities, which span music distribution, video streaming and online books. Total fee-based subscriptions increased by 30% year-on-year to 154 million, primarily driven by online video. There was a 121% increase in subscriptions, to 74 million, for long-form online video (Tencent Video).

Subscriptions were driven by original content offerings, including variety show “Produce 101” and drama series “Legend of Fuyao.” The latter was derived from IP hatched at China Literature. That trend may go some way to explaining why earlier this week China Literature announced plans to acquire film and TV producer New Classics Media in an expensive $2.25 billion deal.

Monthly average users at its powerhouse social media and messaging service WeChat/Weixin increased by 10% to 1.06 billion.

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