Tencent Holdings Ltd.'s recent quarterly results revealed that its core online-games business is slowing down, emphasizing the need for the company to turn to online advertising as a bigger source of growth.
Tencent has become an Internet giant by offering online games to users of its popular messaging and social-networking services. But with the market for PC games becoming increasingly saturated, Tencent's growth in online games has slowed.
Figures released on Wednesday indicated that the rate of growth in online games is slowing to 17 percent in the second quarter, from 28 percent in the first quarter. Tencent's growth in smartphone games revenue also dropped to 11 percent in the first quarter, from 82 percent in the first quarter.
But Tencent's second-quarter net profit surpassed analysts' expectations partly because the company lowered marketing expenses.
While revenue from games slowed down, the growth of online advertising revenue is speeding up, indicating that it might be the new source of future growth.
Online advertising revenue jumped 97 percent to 4.07 billion yuan in the second quarter. Online video-advertising revenue doubled this quarter from a year earlier, with more than half of the revenue coming from mobile videos.
Overall, online advertising accounted for 17 percent of Tencent's revenue in the second quarter, up from 10 percent a year earlier.
"Games will continue to be the core business for Tencent, but investors are looking for the next growth engine. And advertising is a key area," said John Choi, a Daiwa Securities analyst.
Aside from advertising, mobile payments is another area where Tencent can expect increased growth in revenue.
Tencent operates Tenpay, which accounted for 11 percent of China's mobile payment transactions during the first quarter. Alipay, by rival Alibaba Group Holding Ltd., dominated with a 79-percent market share.
To improve Tenpay, Tencent is investing in services to better connect online customers to physical stores.
Earlier this month, Tencent made an offer to buy all the shares of Chinese online travel firm eLong Inc. that it did not already own for $622 million, as part of its efforts to link online users to offline services.