Views on Tencent
What is Tencent?
Tencent Holdings Limited is the leading social platform and technology company in China. The company operates social platforms such as QQ and WeChat which has more than 850 million and 700 million active users respectively.
The company is also the leader in online entertainment, online gaming and other mobile utilities in China. For example, the company is the number one portal for news mobile app and PC. It is also the leader in mobile security, mobile browser, video platform and gaming platforms in the country.
Business model
Tencent Holdings sees itself as the connector in the society. Through its platforms, it connects users with other users, users with merchants and vice versa. Users get to stay connected and access to content, services and transactions from its platforms. Merchants also benefited by gaining access to a larger user base. Tencent also allows merchants to have a place to facilitates online payment transactions and improved on their customer relationship management (CRM) and targeted advertising from the database of Tencent.
Tencent Holdings generate revenue from three main operations:
1. Fee-based revenue: From value added services like social networks and online games. Most of these would require a monthly subscription fee and additional cost when more added-on items are purchased.
2. Traffic-based revenue: With their large user base, Tencent also charged advertisers traffic-based revenue based on its online advertising model.
3. Others: Transaction-based revenue from online payment, services, and e-commerce.
Interestingly, what sets Tencent apart from its peers like Google and Facebook is that the bulk of their revenue is from online gaming and not advertisements. However, this segment is growing rapidly.
Areas of activities in China:
1. Instant messaging No 1, Wechat
2. Online games
3. Online news
4. Video No 1 in mobile video views (think Netflix)
5. Music No 1 in music streaming platform (think Spotify)
6. Literature, largest digital publisher
7. App store No 1
8. Mobile brower No 1
9. Mobile security No 1
Key Opportunities:
1. Leader in China
China is in the process of modernizing its economy. As the country progress and higher value industries started forming in the country, the technology industry would undoubtedly be one of the key industries that the country would focus on. It can already be seen from Tencent’s history of how it has grown with the country.
Tencent’s revenue and net profit have increased at an incredible annual growth rate of 73% and 76% respectively for the past decade.
Maybe we can place how big Tencent really is in perspective. For FY2015, Facebook had revenue of US$5.8 billion. On the other hand, Tencent had revenue of over US$15 billion.
2. Technology
Looking at the development in the technology space globally and in China, it seems that this sector’s growth is far from over. Tencent has only recently started expanding into the e-commerce space through a partnership with JD.com. And with a market capitalization of over US$36 billion, JD.com – one of China’s leading B2C players is no slouch in the Mainland’s e-commerce space. Also if you don’t already know, Tencent holds a 15% stake in JD.com.
Moreover, the company is also investing in mobile banking, mobile transportation and even mobile healthcare. With the development of Internet of Things (IoT) and Tencent’s position as one of the leading technology company in the country, it is well-positioned to benefit from the growing trend of technology in our everyday’s lives.
3. Growing Ecosystem – Network Effect
The network effect happens when a good or service becomes more valuable when more people use it.
The more people use it, the more reach the product has and the more people THINK your good or service is superior to the competition and that in turn attracts more users to your good and service – a good business loop.
Risk:
Too big to succeed?
Some investors are worried that Tencent might have grown too big for its own good. The company has interests in almost every sector from banking, to e-commerce to social media to gaming. Having grown at 76% annually for the past 14 years, it is unsure if the company can sustain this kind of growth going forward.
Tencent will benefit as China's population continues to grow and China's internet penetration rate rises.
Currently China's internet penetration rate of 53% lagged behind Singapore, Malaysia, Korea, USA, Europe.
As China becomes more developed, internet peneration rate will rise.
Tencent chart shows that price tends to rebound at 200 days movings average, as pointed out by the first 2 arrows.
The third arrow is point to price of HKD370. That will be good entry level to average down.
PE of Tencent used to trade at 80x. Due to fall in share price, PE has dropped to 42x.
This indicates that though fundamental of Tencent has not changes, valuation has become much cheaper.
Tencent Holdings Limited is the leading social platform and technology company in China. The company operates social platforms such as QQ and WeChat which has more than 850 million and 700 million active users respectively.
The company is also the leader in online entertainment, online gaming and other mobile utilities in China. For example, the company is the number one portal for news mobile app and PC. It is also the leader in mobile security, mobile browser, video platform and gaming platforms in the country.
Business model
Tencent Holdings sees itself as the connector in the society. Through its platforms, it connects users with other users, users with merchants and vice versa. Users get to stay connected and access to content, services and transactions from its platforms. Merchants also benefited by gaining access to a larger user base. Tencent also allows merchants to have a place to facilitates online payment transactions and improved on their customer relationship management (CRM) and targeted advertising from the database of Tencent.
Tencent Holdings generate revenue from three main operations:
1. Fee-based revenue: From value added services like social networks and online games. Most of these would require a monthly subscription fee and additional cost when more added-on items are purchased.
2. Traffic-based revenue: With their large user base, Tencent also charged advertisers traffic-based revenue based on its online advertising model.
3. Others: Transaction-based revenue from online payment, services, and e-commerce.
Interestingly, what sets Tencent apart from its peers like Google and Facebook is that the bulk of their revenue is from online gaming and not advertisements. However, this segment is growing rapidly.
Areas of activities in China:
1. Instant messaging No 1, Wechat
2. Online games
3. Online news
4. Video No 1 in mobile video views (think Netflix)
5. Music No 1 in music streaming platform (think Spotify)
6. Literature, largest digital publisher
7. App store No 1
8. Mobile brower No 1
9. Mobile security No 1
Key Opportunities:
1. Leader in China
China is in the process of modernizing its economy. As the country progress and higher value industries started forming in the country, the technology industry would undoubtedly be one of the key industries that the country would focus on. It can already be seen from Tencent’s history of how it has grown with the country.
Tencent’s revenue and net profit have increased at an incredible annual growth rate of 73% and 76% respectively for the past decade.
Maybe we can place how big Tencent really is in perspective. For FY2015, Facebook had revenue of US$5.8 billion. On the other hand, Tencent had revenue of over US$15 billion.
2. Technology
Looking at the development in the technology space globally and in China, it seems that this sector’s growth is far from over. Tencent has only recently started expanding into the e-commerce space through a partnership with JD.com. And with a market capitalization of over US$36 billion, JD.com – one of China’s leading B2C players is no slouch in the Mainland’s e-commerce space. Also if you don’t already know, Tencent holds a 15% stake in JD.com.
Moreover, the company is also investing in mobile banking, mobile transportation and even mobile healthcare. With the development of Internet of Things (IoT) and Tencent’s position as one of the leading technology company in the country, it is well-positioned to benefit from the growing trend of technology in our everyday’s lives.
3. Growing Ecosystem – Network Effect
The network effect happens when a good or service becomes more valuable when more people use it.
The more people use it, the more reach the product has and the more people THINK your good or service is superior to the competition and that in turn attracts more users to your good and service – a good business loop.
Risk:
Too big to succeed?
Some investors are worried that Tencent might have grown too big for its own good. The company has interests in almost every sector from banking, to e-commerce to social media to gaming. Having grown at 76% annually for the past 14 years, it is unsure if the company can sustain this kind of growth going forward.
Tencent will benefit as China's population continues to grow and China's internet penetration rate rises.
Currently China's internet penetration rate of 53% lagged behind Singapore, Malaysia, Korea, USA, Europe.
As China becomes more developed, internet peneration rate will rise.
Tencent chart shows that price tends to rebound at 200 days movings average, as pointed out by the first 2 arrows.
The third arrow is point to price of HKD370. That will be good entry level to average down.
PE of Tencent used to trade at 80x. Due to fall in share price, PE has dropped to 42x.
This indicates that though fundamental of Tencent has not changes, valuation has become much cheaper.
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