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Gaming Ban and Higher Costs Hit Tencent’s Q4 Earnings

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Tencent’s fourth-quarter earnings

Tencent (TCEHY) reported its fourth-quarter earnings results on March 21, 2019. The company generated revenue of 84.9 billion Chinese yuan, a YoY (year-over-year) rise of 28%. Tencent’s revenue rose 32% in 2018. The company’s fourth-quarter revenue was better than expected.

In comparison, US gaming stocks Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO) missed revenue estimates in the quarter.

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Biggest profit drop

Tencent’s operating profit fell 33% YoY in the fourth quarter, while its net income fell 32%. Tencent’s fourth-quarter earnings were lower than what analysts had been expecting. This fall was the biggest yearly fall in earnings the company had ever reported.

According to Tencent, “The decrease was greatly affected by non-cash expenses related to capital raising at a subsidiary in the fourth quarter of 2018, coupled with substantial deemed disposal gains relating to the capital activities of certain investee companies (such as the IPOs of Yixin, Sea and Sogou) in the fourth quarter of 2017.”

Gaming ban

Tencent’s 2018 earnings were also affected by China’s (FXI) ban on new mobile games. However, the country has restarted the gaming approvals process this year. Tencent’s price action has lagged other Chinese stocks Alibaba (BABA) and JD.com (JD) so far in 2019.

According to Bloomberg, “Tencent is also shaking up its management ranks. [President Martin Lau] confirmed a Bloomberg report that the company has put 10 percent of its executives on notice, with poor performers to be weeded out to bring in new blood.”

In the next article, we’ll discuss Tencent’s fourth-quarter financial performance in more detail.

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