Tencent Holdings, China's most valuable Internet firm, faces challenges from regulation and competition to maintain its breakneck pace of growth after reporting a near doubling in third-quarter profits.
Tencent's growing dependence on online gaming puts it at risk of increasing regulation of the fast-growing industry by heavy-handed Chinese officials concerned about negative influence of games over issues such as violence and addiction.
NetEase, the country's No. 3 online game operator, recently spotlighted that risk when it got caught in a turf war between two government agencies, putting a promising new title at risk and causing its shares to drop. [ID:nN02450107]
Such developments could similarly affect online game makers, who are often dependent on one or two hit titles for big portions of their revenue from their Internet value-added services. Analysts already expect Tencent's profit and revenue growth to slow to around 40 percent next year, about half of this year's rate, according to Thomson Reuters I/B/E/S.
If their mainstream revenue is still from the Internet value-added services, we don't think that kind of growth is sustainable in the coming three to five years, said Edward Yu, CEO of data tracking firm Analysys International.
In the coming years we are expecting a slowdown because the online gaming market is getting more competitive and also from the NetEase case, there's also uncertainty about regulation from different authorities, he said.
With a market capitalisation of $35 billion -- more than double China search leader Baidu's -- Tencent this year became China's top online game operator with about 20 percent of the market, more than triple its share just three years ago.
China, with its more than 50 million online gamers, is expected to corner more than 40 percent of a global market which will be worth more than $13 billion by 2011, according to research firm Samsung Securities.
Analysts and investors are hoping the company will spin off its online game unit to better monetise one of the fastest growing parts of its business, similar to other recent spin-offs by Sohu.com and Shanda Interactive.
Tencent reported a third-quarter net profit of 1.42 billion yuan ($208 million), up from 737.1 million yuan a year earlier.
Two analysts surveyed by Thomson Reuters I/B/E/S had forecast an average of 1.36 billion yuan.
Total revenue for the quarter rose 66 percent to 3.4 billion yuan, with Internet value-added services, which includes online gaming, contributing 77.8 percent.
Tencent shares have nearly tripled this year on its strong growth prospects, outpacing the 55 percent rise on the Hong Kong Stock Exchange .HSI.
(Reporting by Melanie Lee; Editing by Doug Young and Lincoln Feast)