How M&A activities keep Tencent on fast-growth track

May 17, 2018 16:35
Fortnite online game, which has gone viral in the US and Europe, is widely expected to be a big hit when it is launched in China by Tencent. Photo: Youtube/Gamespot

Tencent Holdings (00700.HK) managed to beat market expectations, reporting a 61 percent year –on-year increase in net profit for the first quarter, at 23.29 billion yuan.

The Chinese internet giant blew past estimates by a wide margin, given that analyst forecasts for the earnings had ranged from a one percent decline to a 27.5 percent gain.

Mobile games and online advertising continued to be the main growth engines.

Powered by mobile games, Tencent's online games division raked in 28.8 billion yuan in revenue in the first quarter, posting a 26 percent year-on-year gain.

Online advertising revenue jumped 55 percent to 10.7 billion yuan in the same period.

The two segments contributed more than half of the company’s total revenue of 73.5 billion yuan.

Before the release of the first-quarter report, there had been concerns in the market about a potential slowdown in Tencent's online game income growth.

Yet, Tencent managed to come up with another hit title "Fortnite", following the tremendous success of games like “Honour of Kings”.

Fortnite, though unavailable in China yet, has gone viral in US and Europe and ranked as the top-grossing game globally in March, according to Superdata.

It's widely expected that the new game will be a big hit when it is launched in China.

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. Fortnite is a case in point.

Fortnite was developed by Epic Games, a company that saw Tencent acquire a 48.4 percent stake for US$330 million.

It’s estimated that Tencent has acquired stakes in nearly 300 companies since 2013, about 50 on average a year.

With strong cashflows and a huge customer base in excess of one billion users, Tencent has been aggressively seeking out start-ups with good potential and boosting their chance of success by providing funding support as well as customer traffic.

This is actually a low-risk strategy to participate in growth opportunities. Not only can this add to the moat and diversity of Tencent’s operations, emerging rivals can also be turned into members of the group at an early stage.

This article appeared in the Hong Kong Economic Journal on May 17

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal columnist