HONG KONG - Tencent, China's largest Internet company, has lost some of its
sheen as a darling of the Hong Kong stock exchange, with the share price
dropping more than 5% on March 18, the day after the company reported
fourth-quarter profit growth of 74%. The stock is now trading at just below
HK$156, after peaking at above HK$175 in mid-January.
The shares tripled in the past year as investors bought into Tencent's success
in attracting advertising and players of its Internet games. Concern is now
growing that the company's spectacular growth might not be sustained. Deutsche
Bank last week downgraded the stock to "hold" from "buy", saying the company's
earnings growth would slow.
Shenzhen-based Tencent increased net profit 85% in 2009 after a 78% gain in
2008. This year could be a different story, with many
analysts expecting the trend to slow. JP Morgan's China Internet analyst Dick
Wei expects net profit to grow only 43% this year, while Credit Suisse Wallace
Cheung and Sharon Jing have forecast 51%.
The nagging worry is that demand for two of Tencent's most popular online
games, Dungeon & Fighter and Cross Fire, is losing steam after shattering
records one after another. Credit Suisse estimated Dungeon & Fighter would
bring in 35% more revenue this year and Cross Fire 13%.
The two contributed a total of 745 million yuan (US$109 million) in the fourth
quarter, or about 20% of Tencent's total revenue, less than two years after
their launch in the second quarter of 2008.
"Dungeon & Fighter and Cross Fire have been [in] the market for a
year-and-a-half and they have reached a mature stage," said a Tencent executive
who did not want to be named. "That means their user growth will be gradual
from now on - no more rapid growth in average concurrent users, peak concurrent
users and so on."
Dungeon & Fighter recorded 2.2 million peak concurrent users in November
2009, up from 1.9 million last May, according to Tencent. Cross Fire had 1.6
million users playing at the same time during peak hours in November 2009.
Even so, the armory that gamers can purchase can be adjusted to encourage sales
and maintain the interest of existing users. "Revenue [of the two games] can
still grow 40-50% this year, as users play more and pay for more weapons or
more expensive weapons," said the Tencent executive. "This can be achieved by
promotion and game designs - for example no more simple, inexpensive weapons,
only better and more expensive ones."
That may work in the short term, but the longer-term will demand new games, a
problem confronting many of China's leading online game companies that have
seen demand for their products plateau or even decline.
Fantasy Westward Journey, introduced by Nasdaq-listed Netease in January 2004
and now China's most popular online game, attracted 2.3 million peak concurrent
users in the third quarter of 2008. The number plunged to as low as 1.7 million
before rebounding to 2.5 million in the third quarter of 2009. World of
Warcraft, a global blockbuster, has maintained the same level of peak
concurrent users in China, about 1 million, since the fourth quarter of 2007.
Westward Journey II, a Netease game introduced in 2003, saw its peak concurrent
users slide to about 547,000 in the third quarter of 2009 from a high of
897,000 in the fourth quarter of 2008.
Such massive multiplayer online role-playing games (MMOPRG) are the most
popular kind of Internet games among China's serious players, contributing 84%
of total online game revenue, according to JP Morgan. While demand for a new
game can climb quickly, it can peak within a relatively short time. "As a rule
of thumb, typical popular MMOPRG games reach their peak in around three years,"
said Wei of JP Morgan.
To lengthen the lifespan of their games developers and operators extend maps,
create new weapons and run special virtual events. Typically, operators have a
new release every month and a major upgrade once a year.
Yet ultimately the only way a game company can substantially increase revenue
is to develop new hits - and new mega-hits are rare and far between.
Tencent will introduce more than 10 new games this year, including four MMOPRG,
but not one of them is expected to be a major hit. Credit Suisse's Cheung
expects new games to account for only 6% of Tencent's total game revenue this
year.
Instead, Green ZT, from New York-listed Giant Interactive, is tipped to be the
one big hit this year on the strong reception since its launch this month.
"Green ZT is doing well. Its peak concurrent users have reached 400,000
already," said a venture capital investor based in Shanghai. Others are
cautious. "Many games for which people have had high hopes have turned out to
be disappointments," said a Beijing-based analyst.
For example, after the success of Westward Journey II and Fantasy Westward
Journey, Netease developed Datang and Tianxia. Both flopped.
Driving efforts to find a new hit is the high and growing demand in China for
online games of one sort of another. The country's Internet population, already
the world's biggest, is continuing to grow and high-speed broadband is becoming
more widely available. At the same time, the limited leisure alternatives for
teenagers encourages more of them to turn to online games as a favorite
pastime, said Wei.
JP Morgan estimates that online games revenues would jump to US$4.69 billion
this year, up from about US$3.55 billion in 2009.
The genre of social games is an increasingly attractive alternative to
multi-player shoot-em-up games, mirroring developments in the United States,
where products from San Francisco-based Zynga allow Facebook users to create
and manage farms or have fun building collections of fish.
Social games attract people not usually associated with online gaming or who,
like housewives, do not have time to play more sophisticated games, said Wei.
Kaixin001, one of the most popular social network sites in China, has built its
popularity on social games since it began in March 2008 and is now the
country's 11th most popular site, according to Alexa, a web traffic monitor
service provided by Amazon. Other players, such as Renren and Tencent, are now
launching their own social games.
"We estimate daily active users on Chinese social network sites playing social
games to be comparable to the number of active users on Facebook, or about 60
million daily active users," said Wei. "We believe the social gaming trend will
continue to pick up in China because community features add to the stickiness
of social games." People can play with their friends and they can track the
progress of their friends through the social networking platforms. This gives
them a sense of competitiveness and that helps to keep them playing.
Social games are Tencent's new gold mine and it has introduced many to Qzone,
its social network service. This helped boost the number of Qzone users to 388
million in the fourth quarter of 2009, from 183 million a year earlier. Qzone's
revenue surged 142% to 516 million yuan in the quarter from the year-ago
period.
The growing popularity of social games is keeping some analysts positive about
Tencent.
"We maintain our earnings forecasts. We have reduced our forecast on online
games, while raising expectations for community value-added service revenue,
given the strong growth of the QQ [Tencent] social networking platform and
social games," said Wei.
Sherman So is a Hong Kong-based correspondent and co-author of Red
Wired: China's Internet Revolution.
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