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Earnings Surprise to Further Boost Tencent Stock: Pro

China’s biggest internet company by revenue, Tencent, beat market expectations with the fastest pace of increase in quarterly profit in a year, prompting one analyst to predict further upside in its stock price, which has already risen a whopping 58 percent year to date.

Chinese students play online computer games at an internet cafe in Hangzhou.
Mark Ralston | AFP | Getty Images
Chinese students play online computer games at an internet cafe in Hangzhou.

Alicia Yap, Head of China Internet Research at Barclays Equity Research, upgraded the Hong-Kong listed firm’s 12-month price target from HK$260 ($33) to HK$270 ($35) after earnings were released, which represents an over 17 percent upside from Wednesday's closing price.

Yap says steady growth in Tencent’s online gaming market share, where revenue jumped 53 percent from a year earlier in the second quarter, along with growth prospects in online social networking and e-commerce ventures are some of the reasons for the upgrade.

The firm, which is China’s largest online gaming company, saw net profit rise 32 percent from a year earlier to hit $492 million, its biggest rise since the first quarter of 2011, while revenue rose 56 percent from a year earlier to $1.65 billion. But Tencent has been plagued by fears of a downturn in the gaming industry, which contributes more than 50 percent to its revenues.

Aadil Ebrahim, Managing Director at asset management firm Bowen Asia, however, says Tencent’s business model, which is diversifying from gaming puts the company in a strong position among its Chinese competitors.

“Its [Tencent's] online messaging, its advertising, they’re doing a bit of e-commerce now, its mobile penetration through their WeChat application. So there’s all sorts of different applications,” Ebrhaim said on CNBC Asia’s “Cash Flow.”

Tencent's average revenue per unit or user at 50 yuan ($8) to 100 ($16) yuan per month, makes it still very affordable for people to keep playing games and downloading applications, Ebrahim said.

Another surprise in Tencent’s results was a 72 percent jump in online advertising revenue, which soared to $138 million despite businesses slashing their advertising amid China’s slowdown.

Rival Sina , which generates the majority of its revenue from online advertising, also posted a better than expected quarterly net profit on Thursday of $33.2 million, compared to $10 million a year earlier. But the firm also warned that second-half earnings would not be “significant” and it will turn to offering more services on its microblogging site Weibo to boost revenue.

Concerns over tough times ahead in the sector are echoed by research analysts at Nomura Equity Research, who remain downbeat on Tencent despite the good quarterly results.

“New initiatives in e-commerce, a traditionally low-margin business, as well as continued investment in micro blogs, online video, and other segments with minimal monetization, is exerting significant pressure on margins, in our view,” Nomura said in a report.

- CNBC's Rajeshni Naidu-Ghelani.

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