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Faster China mobile networks to speed up Tencent profit growth

By Paul Carsten

BEIJING (Reuters) - Internet giant Tencent Holdings will have to wait until its biggest customers, China's smartphone users, get hooked up to high-speed mobile networks next year before its $2 billion investment on game and chatting apps really pays off.

China's biggest Internet company wants clients to spend more time, and money, playing games on its social messaging app WeChat and on other platforms, and the faster 4G networks Chinese telecom firms are set to roll out are expected to further these ambitions.

Tencent's social messaging app WeChat is already used by more half of all Chinese smartphone users. Monthly active users grew 124 percent year-on-year in the third quarter, with figures from domestic app stores showing its games are also hugely popular.

Revenues from social networks, which includes WeChat and QQ, rose only 3.7 percent, however, in the third quarter, the company said as it reported on Wednesday total revenue growth of 34.4 percent year-on-year, its slowest rate in six years.

"When consumers are suffering from slow Internet speed it's unlikely they will use mobile that much for online games, for downloading or using sophisticated apps," said Xiaofeng Wang, a Beijing-based analyst with technology research firm Forrester.

"Mobile take-off takes one or two years at least."

Tencent's third-quarter net profit rose 20 percent year-on-year to 3.87 billion yuan ($635.27 million) in the July-September period, just missing analysts' forecasts.

MOBILE SHIFT SHRINKS MARGINS

The company, which is more than 30 percent owned by South African media group Naspers Ltd, still gets the majority of its revenue from computer games but is banking on mobile services to help sustain profit growth as global PC sales decline.

As well as offering games and paid-for stickers on WeChat, Tencent is building its location based services, payment services, e-commerce and financial products.

This shift, however, has eaten into profit growth. Third-quarter profit margins remained a healthy 24.9 percent, but the ratio was the lowest since 2005.

"They're still in transition so we're not expecting strong growth of their top line, it's still stable growth," said Elinor Leung, an analyst with Hong Kong brokerage CLSA.

In looking to monetize its mobile platform, Tencent is following the likes of South Korean firm Kakao Inc's KakaoTalk and Japan's NHN Corp's Line.

Three months after Kakao released Kakao Game last August, its monthly revenue soared ninefold to $35.3 million. Tencent has a 13.8 percent stake in Kakao.

Tencent shares are up 57.7 percent so far this year compared to a 0.85 percent drop in the Hang Seng Index on which it is listed.

($1 = 6.0919 Chinese yuan)

(Reporting by Paul Carsten; Editing by Miral Fahmy)

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