Tencent investors finally given some relief

Tencent beat earnings expectations thanks to ads and a whopping one-time gain, buying it time to find an answer for its plateauing core gaming business.

The social media titan posted net income of 23.3 billion yuan ($3.4 billion) for the September quarter after recording a windfall of 8.8 billion yuan from investments, including the debut of Meituan Dianping.

But revenue grew at its slowest pace in three years. The Chinese government has effectively frozen new game approvals, which means Tencent has been unable to make money off global hits Fortnite and PlayerUnknown’s Battlegrounds. That’s seen the stock shed over $240 billion of market value since a January peak. While China is trying to combat gaming addiction and is reshuffling regulators, uncertainty persists with Tencent counting on its WeChat social network, advertising and belt-tightening to tide it over the drought.

“People are just relieved that they didn’t perform even worse, so the shares could open up higher,” said Li Yujie at RHB Research Institute. “But the shares might not hold up for the full day, because if you look beyond the headline figures, you can see its gaming business is under stress.”

Naspers, the biggest shareholder in Tencent (31%), gained more than 3%.

The profit rise of 30% compares with analyst growth estimates of about 2%.

“Advertising growth helped the company in revenue this quarter,” said Benjamin Wu at Pacific Epoch. “Its gaming business wasn’t great, the PC gaming revenue is dropping when the third quarter is supposed to be a strong season. That spells trouble for the full year.”

Tencent still commands a pow- erful asset in WeChat: the ubiquitous messaging service used by over a billion people to shop, pay for services and hail rides.

The company is also the biggest backer of Meituan, a food delivery and local services giant that held its initial public offering in September and provides another avenue to reach consumers.

The gaming division however still yields more than half its revenue, though that proportion’s dropped steadily as Tencent leverages WeChat.

The Value Added Services business, which includes games, grew by just 5%.