Tencent exceeded earnings expectations on Wall Street on Wednesday as solid demand for advertising has helped limit the impact that Beijing's continued ban on new online games has had on its gaming business of all kinds.
China's second technology company posted net profit of Rmb23.3bn ($ 3.35 billion) for the third quarter ending in September. This was an increase of 31% over the previous year and mistaken forecasts for flat growth.
Income rose 24% to Rmb80.6bn, the slowest quarterly increase in more than three years, but according to estimates. Most of the gain was driven by advertising revenue, which grew by 47%, especially due to a leap in social advertising via Tencent's WeChat messaging application.
"Advertising is the absolute blue sky for Tencent in the long run – options are vast, especially when compared to Facebook," said Douglas Morton, head of Asian research at Northern Trust Capital Markets.
Better than projected results could help reassure investors who have been hit by the Chinese Government's crackdown on the online gambling sector.
Since March, Tencent's gaming business has been hit by a bureaucratic process that has left thousands of games awaiting commercial approval. More recently, Beijing has set further plans to reduce video game launches and online time.
Restrictions have been reduced to Tencent's activity. Smartphone revenue went up only 7 percent in the second quarter, while PC sales fell 15 percent. And while online games accounted for about 40% of the company's revenue last year, it accounted for only a quarter of its turnover in the last quarter.
Poor Chinese indicators and, in particular, poor retail sales may still pose a risk to Tencent's advertising revenue. "If the macroeconomic environment suddenly deteriorates, which will have a negative impact, but we think we should outperform the industry," Strategy Director James Mitchell said at quarterly earnings demand.
"There are some advertisers that have been badly affected by regulatory measures and we are undermining these categories," Mitchell added.
Tencent marketing spends rose only 3% over the previous quarter, compared with 37% over the previous year, and a slight quarterly increase was attributed to non-game divisions. Analysts have speculated that slowing marketing spending suggests Tencent cuts the cost of online gaming because it sees no end in blocking regulations.
The company's stock price dropped 43% from the peak in January.