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Abu Dhabi, UAEMonday 17 December 2018

Tencent sheds $26bn market cap on spending announcement

Tech juggernaut plans to keep spending on areas from artificial intelligence to video that it says may weigh on short-term profitability but anchor long-term growth

A child plays the game 'Honour of Kings' by Tencent in Dezhou, Shandong province, China. The company's plan on spending has hit its value. Reuters
A child plays the game 'Honour of Kings' by Tencent in Dezhou, Shandong province, China. The company's plan on spending has hit its value. Reuters

Tencent Holdings lost more than $26 billion of market capitalisation after Asia’s most valuable company warned it will sacrifice short-term margins, spending on content and technology in pursuit of growth.

Its shares slid 5 per cent in Hong Kong - the biggest fall in over a month - shaving some of the gains that ranked it among the world’s best performers over the past decade. The Shenzhen-based company plans to keep spending on areas from artificial intelligence to video that it says may weigh on short-term profitability but anchor long-term growth. The internet giant reported net income almost doubled to 20.8bn yuan (Dh12.11bn) in the three months ended December, beating projections.

Tencent’s business revolves largely around its vast social networks WeChat and QQ, the twin platforms through which more than a billion people consume games, news and online entertainment while paying for a plethora of real-world services. Chief Executive Officer Ma Huateng is now angling to grab a larger slice of an advertising pie dominated by Alibaba, while investing in new areas such as financial, retail and computing services.

“Tencent needs to invest in new business, it would help the company build a better ecosystem infrastructure to support growth, but it will hurt margins in the short term,” said Benjamin Wu, an analyst at Shanghai-based consultancy Pacific Epoch.

Compounding things, major shareholder Naspers said it would sell stock in Tencent worth about $10.6bn, shaving its stake to 31.2 per cent from 33.2 per cent. It promised however to refrain from further sales for at least the next three years.

Analysts at Credit Suisse and Citigroup lowered their earnings estimates for Tencent after the results. The social media giant remains one of the top performers on the Hang Seng Index over the past year, during which it has almost doubled in value. Of 48 analysts tracked by Bloomberg, 45 have buy ratings on the stock and three recommend hold.

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Tencent’s quarterly profit included gains in the quarter of 7.9 billion yuan thanks mainly to the initial public offerings of Sea Ltd., Sogou Inc. and Yixin Group Ltd. Those are just three of the 600 companies the company has invested in. Quarterly revenue rose 51 percent to 66.4 billion yuan but fell short of projections for 68.6 billion yuan.

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Revenue from the Value Added Services unit, which includes online games and messaging, climbed 37 percent but online advertising sales surged a much-quicker 49 percent. Costs however soared 72 percent, reflecting the expense of acquiring video and music content to keep users hooked as well as investment in new businesses such as cloud computing. Executives told reporters on Wednesday that spending was crucial to the longer term.

“That’s why for the year of 2018 we are planning to step up our investments in a number of key areas,” President Martin Lau told a press briefing. “These investments may negatively affect our near-term profitability, but will generate long term value and new growth opportunities for us.”

Lau said the company’s Tencent Music business is suitable for its own IPO while Ma said a listing of Tencent shares on a mainland exchange would be considered if policy conditions are viable.