Adding it up
Tencent can withstand an advertising slowdown. On May 18 the Chinese gaming giant warned a slowing economy may clip its fast-growing ad business. But soaring revenue from mobile games, which topped $1.3 billion in the first quarter, cushions the blow. Besides, unlike rivals Alibaba and Baidu, Tencent relies less on marketing dollars.
Although the $195 billion web giant beat market expectations with a 43 percent year-on-year rise in overall quarterly revenue to 32 billion yuan ($4.9 billion), a surprise slowdown in advertising sales was enough to push its shares down slightly. By midday in Hong Kong on May 19 they had fallen a bit more than 2 percent. The company cautioned that top advertisers were reluctant to spend due to a weak economy.
Advertising has soared from a very low base, to become one of the fastest-growing parts of the Tencent empire. Last year sales of ads on Tencent’s WeChat messaging app, plus video and news sites, more than doubled to 17.5 billion yuan. That turbo-charged rate of growth now looks unsustainable. Analysts at HSBC have cut their annual growth expectations to 54 percent for 2016.
However, ads are still a comparatively small part of the whole. They now make up 15 percent of total revenue. That puts Tencent in a good spot compared to China’s other internet giants, e-commerce group Alibaba and search engine Baidu, both of whom rely far more on advertising. It accounted for 95 percent of sales at Baidu and 51 percent at Alibaba in the first three months of this year.
Meanwhile Tencent’s core business is doing even better than expected. Traditional desktop games are falling out of favour in China, but the company dominates mobile gaming: in the recent quarter, six out of the country’s top 10 grossing titles were developed or licensed by Tencent, BNP Paribas says. Successful hits like Naruto Mobile lifted Tencent’s mobile gaming revenue up 86 percent year on year. That offsets the industry-wide gloom over advertising.