The mainland's largest instant messaging (IM) service provider Tencent yesterday posted a worse-than-expected profit growth for the third quarter of this year, as the yuan appreciation and a lower tax rebate ate away at the company's bottom line.

Its net profit fell by 58.4 percent quarter-on-quarter to 78 million yuan (US$9.6 million) in the July-September period, Tencent said in a statement.

Despite net profit drops the company's revenue continued to rise, amounting to 362.8 million yuan (US$45 million), up 8.7 percent quarter-on-quarter. Some 204.7 million yuan (US$25 million) came from Internet valued-added services and 121.1 million yuan (US$15 million) from mobile and telecommunications value-added services.

The profit decrease does not live up to an earlier estimate by Nomura Securities, which predicted Tencent would post a net profit of 111.6 million yuan (US$14 million).

Hong Kong-listed Tencent, which offers IM and online game services, attributed July's yuan appreciation and a lower tax rebate as the major factors behind the fall in profits.

The Chinese Government appreciated its currency by 2.1 percent in July.

A 42.4 million yuan (US$5.2 million) loss was recorded from foreign exchange due to this renminbi appreciation, the company said in the statement.

The yuan revaluation reduced the value of the company's US dollar-denominated proceeds from the initial public offering in 2004, Tencent added.

Also, tax rebates for the third quarter were reduced to 12.9 million (US$1.6 million) from 88.6 million (US$11 million) in the previous quarter.

However, the company's operations remain on good track, a Tencent spokesman said.

Total registered IM user accounts climbed to 474.1 million, representing an 8.1 percent growth quarter-on-quarter. Active IM user accounts increased by 6.8 percent from the second to third quarter to 184.8 million.

The companies two core businesses - online instant messaging services and simultaneous online game services - saw revenue growth of 20.4 percent to 30.3 percent in the third quarter on a quarterly basis respectively.

Tencent shares dropped by 2.44 percent to close at HK$8 (US$1.02) after the results were announced yesterday.

Following the announcement, the CLSA China World Index suggested that the mainland's Internet market is still immature and thereby maintained an "underperform" rating for Tencent with a target price of HK$6.22 (80 US cents).

(China Daily November 24, 2005)