Tencent sheds $26B on warning over margins

hong kong — Tencent Holdings Ltd 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 20.8 billion yuan ($3.3 billion) 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 Group Holding Ltd, 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 Shanghaibased consultancy Pacific Epoch. Compounding things, major shareholder Naspers Ltd said it would sell stock in Tencent worth about $10.6 billion, shaving its stake to 31.2 per cent from 33.2 per cent.

The South African company plans to offload as many as 190 million shares, or about a 2 per cent slice of the Chinese firm. It promised however to refrain from further sales for at least the next three years.

Analysts at Credit Suisse Group AG and Citigroup Inc 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.

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 per cent to 66.4 billion yuan but fell short of projections for 68.6 billion yuan. — Bloomberg