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Tencent posts quarterly profits of $362m

Chinese online giant dips from last quarter but continues year on year growth

Tencent, the Chinese mobile, social and online network, has posted second quarter profits of $362 million (£225m), and revenues of $1.041 billion (£641m).

Those profits are up 21.3 per cent year on year, but down 18.8 per cent from the previous quarter. Revenues were up 6.3 per cent by quarter and 44.3 per cent year on year.

Also posted in the same report were half-year interim figures for the company which show revenues of $2.021 billion (£1.24bn), a 47 per cent year on year rise.

Half year profits are $807.8 million (£497m), an increase of 40 per cent from the first six months of 2010. Net margin dropped slightly from 42 to 40 per cent.

"Despite a seasonally weaker period, we achieved solid growth in both operational and financial metrics in the second quarter of 2011," said Tencent CEO Ma Huateng.

"As we continued to unfold our open platform strategies during the period under review, we have made significant progress in forming partnerships and making strategic investments across industries including e-commerce, entertainment and security, which are aligned with our key development initiatives. "

Part of the reason for the mild growth slowdown is the plateauing of internet usage in China following the huge expansion of recent years after legal relaxation on access restriction, however, some analysts also see warning signs in Tencent's figures.

Doug Creutz of Cowen sees a continuation of the slowing trend in the company's figures, and indeed for the Chinese gaming market in general, due to increased competition and a rising percentage of marketing spend.

"Our overriding concern with the China online gaming space is that competitive dynamics appear to be driving a market share war that is being fought by accelerating increases in R&D and marketing budgets," said Creutz.

"We believe this unhealthy environment could persist for several years.

"In the last three years, industry spending on R&D and marketing as a percent of revenue has increased from 18 per cent to 26 per cent (excluding Tencent), and the level of increase has been accelerating in recent quarters. We expect this dynamic to last for several years as there are a plethora of well-funded competitors in the space."