Tencent Q1 net profit surges 61 pct, beats estimate

Tencent is back in the $500 billion club. The Chinese tech conglomerate which owns the popular We Chat and QQ messaging and payment apps and a host of top mobile games reported earnings that topped forecasts

Tencent Sees Profit Increase of 61% Thanks to Games Business

Profit was up 61% at 23.29 billion yuan ($3.7 billion).

Warnings that Tencent, Asia's highest-valued tech company, might suffer a rare poor quarter of business proved unwarranted after the company smashed analyst expectations for its latest earnings thanks to its fast-growing mobile games business.

Tencent's WeChat messenger app now has 1.04 billion users.

Tencent, China's leading provider of mobile messaging and online games, reported revenue of 73.53 billion yuan, or $11.693 billion.

Tencent's PC games, which are more lucrative than smartphone games and was once its largest revenue contributor, saw a decline in active user numbers due to the continued shift to smartphones, with revenue from the segment flat at 14.1 billion yuan. All businesses contributed to growth, with revenues going up 340 percent at Value Added Services, and rising 26 percent at online games.

"The most important thing is the halo effect coming through in gaming", Neil Campling, co-head of the global thematic group at Mirabaud Securities, told CNBC by phone on Wednesday. The first is called "PlayerUnknown's Battlegrounds" or PUBG, which is a massive multiplayer online game. The increase there was mainly driven by growth at smartphone games, including existing titles such as Honour of Kings and newly launched titles MU Awakening and QQ Speed Mobile.

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"Fortnite" is the second game driving Tencent's strong quarter. The tournament-style game is popular amongst the e-sports, which is competitive video gaming.

Looking forward, Tencent CEO Ma Huateng said the company will continue to invest in improving its own products and enabling services for its partners. It invested $632 million in game-streaming platforms Douyu in March, $462 million the same month on Huya. It is also on mobile too.

The market is still quite bullish on the stock, despite some of the concern over spending. Instead, the company delivered record quarterly profit and better-than-expected margins. But in the three months ended March 31, Tencent manage to raise its operating margin by 8 percent quarter-on-quarter. Capex jumped 200 percent to CNY 6.318 billion.

Despite criticism that Tencent has lost its innovation ability and has become more like an investor, the company has proved that its investing activities actually go hand in hand with the development of its core business. The company's investment in original content helped drive paid video subscriptions up 85 percent on the year.

Profit was also helped by one-time gains of nearly 7.6bn yuan from its investments in arenas like video and news.

Bernstein analysts estimate Tencent's merchant subsidy will be around $1 billion in 2018 while subsidies by Alibaba's Ant Financial Services affiliate could be as high as between $2 and $4 billion.

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