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Tencent Results Show Rising Cost of Compliance, Impact of China’s Slowing Economy

Tencent, the Chinese tech giant that commands dominant positions across games, music, streaming and social media, Wednesday revealed third quarter results weighed down by slowing ad sales, slowing PC games and rising costs.

Revenues in the July-to-September period showed a 21% year-on-year increase to RMB97.2 billion ($13.8 billion). Net profits dropped 13% to RMB20.4 billion or $2.91 billion (but increased by 24% to RMB 24.4 billion using the non-IFRS method of expression).

But quarter-on-quarter comparisons showed the group slowing. On that basis, revenues grew only 9% and net profits dropped by 16%. Non-IFRS profit was up only 4%.

Total online games revenues increased 11% year-on-year to RMB28.6 billion ($4.07 billion), reflecting growth in smart phone games that offset continuing declines in PC games.

While the company’s results statement did not specially discuss the challenging regulatory environment in China, where authorities have throttled commercialization of video games and where last year’s cleanup of entertainment industry taxation slowed film and TV series production, the document released to the Hong Kong stock exchange was peppered with clues.

“We have proactively implemented our Healthy Gameplay System since 2017 and upgraded it last year, in order to foster balanced game-playing habits among younger players. As a result, we believe the recent regulations that limit younger players’ game play will have limited additional impact to our business,” the statement said.

Other signals of the cost of regulatory compliance included enhanced security protocol and proactive cleaups of QQ accounts that engaged in spamming, and bot activities.

In response to the growing difficulty of doing business in China, Tencent has tried to grow its overseas activities. It referred to “increasing contributions” from overseas games and businesses, where Tencent has ownership or stakes including “PUBG,” PUBG Mobile” and “Call of Duty Mobile.” “International markets contributed a teens percentage of our games revenue in the quarter,” the company said. And after completion of the quarter, Tencent increased its stake in Finnish games firm Supercell, giving it a majority-control position that will be reflected in future results.

“In China, ‘Peacekeeper Elite’ contributed to cash receipts for the full quarter, but is still in the early stage of deferred revenue recognition,” the company said. “DAU of ‘Honour of Kings’ remained healthy and more users purchased season passes. New role-playing and strategy games also contributed to the quarterly revenue growth. Internationally, ‘PUBG Mobile’ doubled its MAU year-on-year, and we co-developed the ‘Call of Duty Mobile’ game with Activision Blizzard, which exceeded 100 million downloads within a month of launch, making it one of the biggest ever smart phone game launches.”

Combined monthly average user numbers of WeChat/Weixin was 1.15 billion, up 6% year-on-year. But smart-device monthly average users of Tencent’s older QQ platform were 653 million, down 6% year-on-year.

Another key metric was confirmation that Tencent Video now has more than 100 million paying subscribers. “Fee-based value added service subscriptions increased 11% year-on-year to 170.6 million, mainly attributable to video and music subscriptions. Tencent Video subscriptions grew 22% year-on-year to 100.2 million. Music subscriptions increased 42% year-on-year to 35.4 million as our paid content library expanded,” the company said.

Tencent Music results were announced separately.

As the group pushes subscription business, its ad-supported activities are hurting. “Media advertising revenues decreased by 28% to RMB3.65 billion,” the company said in its filing. “The decrease was primarily driven by lower revenues from our media platforms including Tencent Video due to the challenging macro environment and unpredictability in scheduling major content releases.”

The company said that Tencent Video drew lower sponsorship advertising revenues as a result from uncertain content-broadcasting scheduling.

And Tencent is having to spend more heavily too. “Cost for VAS increased by 27% to RMB24.4 billion for the third quarter of 2019 on a year-on-year basis. The increase mainly reflected greater content costs for services and products such as live streaming, video streaming subscriptions and online games, as well as higher channel costs for smartphone games,” the company said.

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