Tencent says payment subsidy war set to continue after profit beat

* Q1 net profit 23.3 bln yuan vs 17.5 bln analysts' estimate
* Gross margin up at 50.4 pct; 1st sequential rise since
* President says WeChat Pay subsidies to continue

(Adds details from earnings call)
By Sijia Jiang
HONG KONG, May 16 (Reuters) - A subsidy war in China's
mobile payment market between its two biggest tech firms Tencent
Holdings and Alibaba Group is set to
continue, Tencent's president said after the firm reported a
better-than-expected 61 percent jump in quarterly net profit.
Asia's second-most valuable listed company said on Wednesday
net profit for the first quarter was 23.29 billion yuan ($3.66
billion), beating the average analysts' estimate of 17.5 billion
Strong mobile gaming revenue and 7.585 billion yuan in
investment gains helped buoy its gross profit margin to 50.4
percent, the first sequential quarterly increase since the
second quarter of 2015.
Tencent has stepped up its investment activities over the
past year, not only making deals in areas like gaming,
entertainment and frontier technology, but also in retail and
e-commerce - traditionally viewed as rival Alibaba's turf.

In a battle for the world's largest mobile payment and
retail market, Tencent has splashed out billions forging
alliances with new partners like Carrefour and subsidising
merchants to lure them onto its payment-to-messenger super app
Bernstein analysts estimate Tencent's merchant subsidy will
be around $1 billion in 2018 while subsidies by Alibaba's Ant
Financial Services affiliate could be as high as $2-$4 billion.
WeChat had 1.04 billion users as of March and WeChat Pay is
more popular than Alibaba's Alipay in offline payment, though
the latter is bigger in overall transaction volume.
"It is a matter of a fact that the competition is actually
very heavy, there have been a lot of subsidies provided in the
market by our market peers, and as a result we have to follow
suit," Tencent President Martin Lau said on an earnings call.
Tencent reported a 111 percent rise in "other" revenue in
the quarter to 15.96 billion yuan on growth in payment solutions
and cloud services. But the cost of revenue in that category
doubled to 11.91 billion yuan, due to subsidies and promotional
"We do believe this level of subsidy will continue in the
near-term future, because it is indeed a very big opportunity
and we expect all industry participants should be investing
heavily in this market," Lau said.
He added that Tencent's WeChat ecosystem gives it a unique
position to take advantage of an enlarged market.
Total revenue rose 48 percent to 73.53 billion yuan, beating
the 70.93 billion yuan average estimate.
Smartphone games revenue, the largest revenue contributor,
was 21.7 billion yuan in the quarter. Its 'Honour of Kings'
remains the highest grossing smartphone game in China's iOS Top
Grossing Chart, while new tactical tournament games like
Fortnite are gaining popularity globally, Lau said.
The company, however, warned that delays in earning revenues
from those games in China and heavy marketing expenses are
expected to hit mobile games revenue in the short term.
Social networks revenues, including from Tencent's video and
music business, increased by 47 percent to 18 billion yuan.
Tencent attributed the increase to growth in digital content
services such as live broadcast, video streaming and in-game
virtual item sales, and its Karaoke app WeSing.
Tencent's PC games reported flat revenue of 14.1 billion
Tencent's shares have fluctuated sharply this year. They
surged to a record high in January and then again in March to
become Asia's most valuable listed company, temporarily
overtaking Facebook Inc as the world's fifth-most
valuable company. Since late March, the shares have seen a sharp
reversal, losing about $87 billion in value to leave Tencent
with a market capitalisation of about $480 billion.
The drop was partly triggered by the company's warning in
March that margins may be hurt by its plan to invest
"aggressively" this year into areas including video content
acquisition and payment subsidy.
($1 = 6.3694 Chinese yuan renminbi)

(Reporting by Sijia Jiang; Editing by Muralikumar Anantharaman
and Adrian Croft)

First Published: 2018-05-16 11:44:38
Updated 2018-05-16 16:48:45

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