Tencent profit plunges 32% but its gaming business is recovering

Tencent’s troubles aren’t over yet.

The Chinese gaming and social media company on Thursday reported a sharp drop in net profit for the last quarter of the year. It came in at 14.3 billion yuan ($2.1 billion), a 32% plunge from the same period a year earlier and below analysts’ estimates.

Tencent (TCEHY) said the sharp fall in profit was mainly due to costs related to the US listing of its streaming music subsidiary, Tencent (TCEHY) Music, in December. The company took a one-off hit of about $224 million, according to analysts.

Tencent startedlast year with a bang, with its shares soaring to a record high in January 2018.But a regulatory crackdown on gaming in China hit its business hard, resulting in a big earnings miss in August. Shares in the company tumbled,not helped by a broader sell-off in the global tech market.

Tencent’s fourth quarter earnings showed some positives, though. Revenue rose 28% to 84.9 billion yuan ($12.7 billion) from a year earlier.

Online games account for some 30% of Tencent’s revenue. In the last quarter of 2018, the company was still suffering from China’s nine-month freeze on approval to make money from new games.

But revenues from Tencent’s mobile games rose 12% to $2.8 billion. That was “better-than-feared,” according to Karen Chan, an analyst at investment bank Jefferies.

TIANJIN, CHINA - 2017/10/01: Young players practice the mobile game Arena of Valor, prepared for the battle match held in a shopping mall. Arena of Valor: 5v5 Arena Game, China's most popular mobile game developed by Tencent Inc, which is the world's largest mobile games developer. In the first half of 2017, the sales of China's online game market reached 99.78 billion yuan, of which the revenue from mobile games industry arrived at 56.2 billion yuan, ranking first in the world. (Photo by Zhang Peng/LightRocket via Getty Images)

Related article Tencent can finally start making money on new games in China again

Tencent’s gaming business looks set to do well in 2019.

Chinese authorities ended the freeze on game approvals at the end of December. So far, eight games developed or licensed by Tencent have been given the green light this year to start making money.

Brokerage firm Daiwa said Tencent’s solid gaming business will continue to pull in money, users and overseas players. That should make its stock more attractive to investors.

“We believe the company’s ability to procure quality gaming content in adverse market conditions will drive a recovery in sentiment,” Daiwa analysts wrote in a report published Wednesday.

Tencent is still waiting for approval in Chinafor some of its most highly anticipated mobile games like “Fortnite” and “PlayerUnknown’s Battlegrounds.”

Analysts at HSBC pointed out this week that Tencent rival NetEase (NTES) received approval for FortCraft, a survival shooting game similar to Fortnite, at the end of February.That could indicate that approval for Fortnite may be coming soon.

Tencent’s strong fundamentals in gaming, advertising, online payments and cloud services “should enable it to weather any headwinds,” the HSBC analysts wrote in a research note.

Tencent shares in Hong Kong closed down about 2% on Thursday ahead of the earnings report.

Tencent Music (TME) reported its first earnings as a public company on Wednesday, disappointing investors. The music unit’s shares plummeted more than 10% in New York.