Tencent profits bounce back. But there's trouble ahead

Shares in Tencent tumbled nearly 3% in Hong Kong on Thursday after the tech giant reported sales that fell short of analyst expectations and warned that an economic slowdown in China was hurting its advertising business.

The stock decline wiped 92 billion Hong Kong dollars ($11.7 billion) off the company's market value.

Tencent released 10 video games during the quarter after the Chinese government lifted a suspension of new game approvals that had limited the company to just one release in the first quarter.

That helped drive profits higher to 24.14 billion yuan ($3 billion), topping analyst estimates.

Revenue of 88.8 billion yuan ($12.6 billion) failed to impress, however. Growth in the company's online advertising business slowed amid rising trade tensions between the United States and China.

The environment is "challenging" for the advertising business, Tencent Chairman and CEO Ma Huateng said in a statement. "We expect the negative impact from the current business environment will persist in the second half of 2019."

China's economy is growing at the slowest pace in nearly three decades as it feels the effects of a prolonged trade war with the United States. Data published this week point to continued weakness.

Alex Wong, director of asset management at Ample Capital in Hong Kong, said the country's carmakers, real estate companies and financial services firms were spending less on ads as a result of the slowdown.

"China's economic downturn is taking a toll on Tencent, because companies impacted by the slowdown spend less money on advertising," he said. "Advertising is a big part of its revenue source."

Tencent also said that its media advertising revenues dropped 7%, partly because some TV drama series were delayed because of government restrictions on content.

Following the earnings announcement, several analysts downgraded their target prices for Tencent's stock.

"The smartphone game momentum is not enough to offset the softness in advertising revenue growth," Citi analysts explained as they cut their target price.