Company Focus: Tencent
Hello investors, welcome to my Substack channel, where I study the best Investors and businesses from around the world. This week, we will take a look at Tencent.
Tencent was founded in 1998 and is based in Shenzhen, China. Its guiding principle is to use technology for good. Tencent is more of a holding company with interests in a variety of industries.
Tencent reports its financials in three main business segments, these are:
1. Value-Added Services which includes social networks and online games.
2. Online Advertising and WeChat
3. Fintech and Business Services
Due to recent public news, about chinese regulations I’d also like to talk about
4. Current Regulations and Impact on Tencent’s holdings
Let's take a closer look at each one individually.
1. Value-Added Services which includes social networks and online games.
Starting with social networks and value-added services, Tencent social networks accounted for 21% of Tencent's overall revenue, up 27% year over year. WeChat, which has 1.23 billion monthly active users, and QQ, which has 595 million monthly active users, are two of Tencent's most popular social networks. Tencent Video, a leading video streaming service with 123 million paid subscriptions, up 17% year over year, and Intensive Music, a leading music services platform with 881 million mobile monthly active users and 56 million paid subscriptions, up 40% year over year, are among the other businesses and social networks. The other Value-Added Service is Online Games, which accounted for 29% of Tencent's total revenue, up 29% year over year. With a 60 percent share of the domestic PC games market and a 54 percent share of the domestic mobile games market on iOS, Tencent is the largest domestic developer and publisher of video games.
Tencent will release a slew of new games and improve its gaming technology in 2020. Tencent released Valrant on PC for international markets as well as Moonlight Blade Mobile and COD Mobile for the domestic market in terms of new games. Valrant, a multiplayer action game that took more than six years to develop, was the most popular PC game released in 2020. Moonlight Blade Mobile was the best-performing 2020 released mobile MMORPG in the domestic market, thanks to its proprietary game engine. Furthermore, by daily active users, COD mobile was one of the most popular domestic mobile games.
For the fourth year in a row, Honor of Kings was the top-grossing domestic mobile game, and for the second year in a row, it was the top-grossing mobile game worldwide.
The League of Legends world championship finals drew over 45 million concurrent users, setting a new record for esports viewership. League of Legends wild rift, a mobile version of the game, grew the franchise's user base even further. For the second year in a row, PubG mobile was the most popular mobile game by monthly active users, and its flagship tournament was the most watched esports competition among all mobile games.
Tencent also partnered with Nintendo in 2020, distributing over a million Nintendo Switch consoles in China through collaborations with well-known console games and other IPS. Tencent is expanding the reach of its new mobile games around the world.
2. Online Advertising and WeChat
The key players in China's search engine advertising are Tencent, Soso, Baidu, Sogou, Google, Bing and Yahoo! China. But in early 2015, Google decided to pull its search engine out of the Chinese, which allowed Tencent to become the top choice for search engine advertising in China.
Tencent's digital advertising revenue accounted for 18 percent of total revenue, up 22 percent year over year. WeChat moments and its mobile ad network, in addition to offering in-game video and music advertising, drove Tencent's advertising revenue growth.
Tencent, is much more than a gaming, fintech, or communications firm. With a large investment portfolio and business services in the WeChat ecosystem, they have a lot of potential. Let's start with Tencent's WeChat ecosystem, which Monish Pabrai refers to as their "Bazooka."
Tencent owns WeChat, which has 1.23 billion monthly active users and is one of the world's largest messaging platforms. Because of all the different features and functions available within one mobile app, WeChat is considered a super app. People use WeChat for a variety of things, including payments, shopping, ride hailing, food delivery, and more. WeChat mini programs are the main feature that allows people to access all of these different functions. Tencent allows companies like JD.com, Meituan, and bili bili to create a variety of WeChat apps. This gives users another way to interact with their platforms. To increase competition, the CCP recently forced Tencent to add Alibaba to WeChat. Tencent monetizes these platform transactions by making WeChat Pay one of the primary payment methods.
Daily active users for WeChat mini programs will have increased by 33% to 400 million by 2020. The number of mini programs used increased by 25% year over year, while the average transaction value increased by 67 percent. Meanwhile, the gross merchandise value of WeChat mini program transactions increased by 100% year over year to $247 billion in 2020, making Tencent one of the world's largest e-commerce companies.
WeChat's built-in search feature and WeChat mini games have both surpassed 500 million monthly active users, with total mini game revenue up 20% year over year. WeChat will offer Taobao deals, Alibaba's social e-commerce platform, as a WeChat mini program starting in March 2021. Taobao Deals will accept WeChat Pay payments as part of this initiative. Given that the two companies are major competitors and have historically closed off their ecosystems to one another, this marks a major turning point in their relationship. Customers and the two companies could gain more value if the two companies can continue to open up their ecosystems to each other. Tencent's mini program strategy is particularly effective because the company not only partners with but also invests in companies that create mini programs for WeChat.
3. Fintech and Business Services
Meanwhile, Tencent's Fintech and business services revenue accounted for 29% of the company's total revenue, up 29% year on year. The increasing use of payments and wealth management services drove revenue growth in Fintech services. Total payment volume, facilitated by WeChat Pay, increased significantly as a result of increased daily active consumers and higher payment frequency in areas such as retail public services and groceries within business services.
Tencent Cloud, as well as software services such as WeCom, Tencent Meeting, and Tencent Docs, helped the company grow its customer base. Investors are concerned about increasing Fintech and market regulation for internet platforms, despite Tencent's strong financial performance in 2020.
There have been significant regulatory changes in the Fintech space for online lending since the fourth quarter of 2020, including more loan restrictions, capital requirements, and leverage ratios. The growth of online consumer credit and lending services is expected to slow in the future. Online wealth management and payment services have also been scrutinized more closely.
Tencent's online lending is handled by WeBank, a digital bank in which Tencent holds a 30% stake. Tencent makes money by charging a fee on loans distributed through the WeChat wallet.
Tencent management emphasized that their operations are fully compliant with regulators and that they will work closely with them to make any necessary changes. They stated that risk management takes precedence over scale, particularly in the Fintech industry. As a result of their caution, Tencent management claims that they are less affected by these regulations. In addition, in order to meet new requirements, Tencent may need to change its Fintech corporate structure, which would entail restructuring its assets under a financial holding company. From Tencent's perspective, this could result in a loss of control over the financial holding company.
4. Current Regulations and Impact on Tencent
This leads us to Tencent's next big opportunity: their investment portfolio. Tencent is one of the world's most successful and largest tech investors. The fair value of Tencent's public company investments increased 187 percent year over year to $185 billion by the end of 2020. Tencent is said to have made over 1200 investments totaling $280 billion. Equity investments such as JD.com, Pinduoduo, Meituan, bili bili, Futu, and Neo outperformed the overall stock market by a wide margin in 2020, with equity investments such as JD.com, Pinduoduo, Meituan, bili bili, Futu, and Neo increasing multiple folds.
The fact that many of these outperforming investments have their own WeChat mini programs, which allows them to receive additional user traffic, is a common thread. This helps the companies increase revenues and profits while also contributing to Tencent's investment returns. C Limited, Snapchat, Pinduoduo, Spotify, and Afterpay, all Tencent investments outside of the WeChat ecosystem, saw significant outperformance in 2020.
Tencent also had a number of high-profile investments go public in 2020 and 2021, including Baker, Kwashow, and Roblox, all of which saw significant returns from their initial listing prices.
In terms of more general market regulation for internet platforms, Tencent has shown strong regulatory cooperation, particularly after their gaming business debuted in 2018. Tencent may face challenges as a result of its merger agreement with Huya and Doyu, two leading game live streaming platforms in which Tencent has a controlling stake.
Tencent's investments are also attracting more regulatory scrutiny, which could limit the company's ability to deploy capital at the speed and scale that it does now. However, if Tencent can overcome its regulatory hurdles, maintain its economic moat, and maintain double-digit top and bottom line growth rates, a trillion-dollar market valuation appears to be a matter of when, not if.
Let's look at all the investments that Tencent has:
Communications: With Wechat and QQ Mail, they have a virtual monopoly in the communications sector.
Search and Cloud: They've branched out into Sougou Search and Tencent Docs, Tencent's online document tool, which had over 100 million monthly active users in 2020, which is up more than fourfold from the previous year. Tencent Cloud is the company behind these services; while it still trails Alibaba in terms of market share, Tencent Cloud is the market's second largest player, with the shift to the cloud being a circular trend.
Gaming: With Tencent Games, they have a significant presence in the gaming industry. Tencent is the world's largest gaming company, owning and investing in popular titles such as League of Legends, Clash of Clans, and Fortnite. Recently, the Chinese Communist Party (or CCP) had launched a series of regulatory crackdowns on Chinese big tech companies, and Tencent was no exception. Tencent's stock has lost more than a third of its value since February, since investors fear that the company's long-term compounding potential has been harmed by the CCP's new gaming policies, which aim to curb gaming addiction among minors while also pursuing "common prosperity."
Software & Apps: Excluding their huge virtual monopoly in the phone apps sector, they have significant investments in QQ doctor - which is an antivirus software, QQ Pinyin - Which is an input-method, QQ Software manager, Tencent Traveler - which is it's internet browser, and QQ Player - which is their multimedia player.
E-com: They have a significant stake in the ecommerce sector, including paipai and yixun, as well as the giant JD (with whom they collaborate), and, of course, a 30% stake in PinDouDou.
Portal business: They're also in the portal business, with QQ.com, the world's largest news and entertainment portal.
Location-based services: They've also made investments in location-based services, such as their collaborations with Didi and dianping. Tencent is also a shareholder in Didi, the world's largest ride-hailing and transportation services firm. Didi went public in 2021 at a valuation of $100 billion, making it one of the world's largest initial public offerings.
Payment: In this sector, their bazooka is, of course, WeChat and Tenpay. QQShow and QQLive are entertainment-related apps.
Social Media: Along with WeChat, which you could argue is in the social media business, they have a stake in Pengyou, which caters to students. City elite, which caters to adults, and Qzone, which caters to teenagers, in the social media sector. They also have 58.com, which is China's version of Craigslist. Oh, and Tencent is a shareholder in DISCORD, a messaging platform that Microsoft is negotiating to buy for $10 billion.
Music: Tencent announced two significant investments in Universal Music Group and Rakuten in 2021. Universal Music Group (UMG) is one of the three major record labels, and it has a partnership with Tencent Music Entertainment, Tencent's music subsidiary. On Saturday, the State Administration for Market Regulation ordered Tencent to give up its exclusive music licensing rights and slapped a fine on the company for anti-competitive behavior, effective July 24, 2021.
So yup, I think it's fair to say that they are the largest company many Americans haven’t heard about.
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