Tencent Holdings Ltd, China's biggest Internet company by revenue, reported its slowest profit growth in four years, missing analysts' estimates on softer growth in its casual games and lower margins due to increased investments.
Tencent posted a 13.6 percent rise in third-quarter net profit to 2.45 billion yuan ($386 million), missing analysts' forecast of 2.63 billion yuan. After accounting for currency losses and net losses from changes in the value of financial assets, Tencent booked a profit of 1.94 billion yuan.
Their topline is better, driven by games, and advertising was better sequentially...What the Street is worried about is that they will make further investments and there will be further margin downside, said Hong Kong-based JPMorgan analyst, Dick Wei.
Net margins fell to 32.6 percent from 34.8 percent in the previous quarter, due to investments in e-commerce and online video.
Our margins declined in the third quarter as we invested further in our strategic initiatives, including our open platform, Tencent Microblog, e-commerce, search, online videos and online security services, to help position us for long-term growth, Tencent said in a filing to the Hong Kong stock exchange.
MORE INVESTMENTS TO COME
Tencent is forecasting an uncertain macroeconomic outlook for China due to the European debt crisis, but said it will continue to invest selectively.
Last month, the company invested in Chinese social networking site Kaixin001 and launched a super e-commerce platform to better compete with Taobao Mall, China's largest online business platform.
Earlier this year, Tencent invested in eLong, an online travel agency, Kingsoft Corp Ltd, an antivirus firm, and U.S. games publisher Riot Games.
The company said the investments were essential for growth, but analysts do not see meaningful revenue from these ventures in the near to medium term.
Tencent faces stiff competition from online game operators such as Shanda Games Ltd and Netease.com Inc, as well as social games firms such as Renren Inc.
For the quarter, Tencent said its community value-added-services (VAS) saw revenue growth slowing due to maturity in its casual games such as QQ Farm and QQ Ranch.
Internet value-added services, including online games and community VAS, formed 80.1 percent of revenue at 6 billion yuan.
Total revenue was 7.5 billion yuan, up 43.4 percent from a year earlier and beating forecasts of 7.12 billion yuan.
Shares in Tencent, which is more than 30 percent owned by Naspers Ltd, South Africa's biggest media group, ended 0.97 percent higher on Wednesday before its earnings announcement, versus the Hang Seng Index's 1.71 percent gain.
($1 = 6.346 Chinese yuan)
(Additional reporting by Lee Chyen Yee in HONG KONG; Editing by Vinu Pilakkott and Matt Driskill)