TENCENT - Is It Done Yet?

When I examined Singapore Press Holding's sunset industry in print media, I was given a stark reminder that we need to be forward-looking, and to always look for new investment opportunities wherever they arise. I've been doing some reading on fintech, e-wallets, and blockchain technology - this could prove to be a huge area for future growth.

This brings us to Chinese tech giant Tencent Holdings (0700.HK). Tencent is the mastermind behind WeChat, and their core revenue comes from various holdings including video gaming, digital sales, online advertising, and electronic payment. Various major Tencent subsidiaries have decent synergy, allowing for smoother integration and partnerships.

[NOTABLE HOLDINGS]

Tencent Chairman, Mr. Ma Huateng, has expressed confidence in the company's short-term future, especially regarding the company's video-streaming subsidiary: Tencent Video. Tencent Video has exceeded 43 million subscribers as of October 2017, making it one of the biggest streaming service providers in China. This is slightly less than half the number of subscribers that the American-based Netflix has, for comparison (100+ million).

Tencent also has a major stake in video games on the PC - a diversification that netted the company 27% year-on-year growth during 3Q. Tencent acquired Riot Games - the makers of online hit League of Legends - in 2015, and have been making efforts to promote and retain players through tournaments and advertising. League of Legends consistently remains among the top-five most viewed games on game-streaming site Twitch. Personally, as a gamer myself, this segment requires monitoring - gaming trends come and go, and massive titles eventually fade away. Tencent's investing habits (which I'll go into later) indicate that they have some spare cash to burn - as gaming and e-sports is on the rise, we might see more acquisitions coming their way over the next couple of years. On a side note, the creators of League of Legends have gone into brainstorming for a potential new game. *UPDATE* It has just come to my attention that Tencent has acquired exclusive rights to publish the successful PlayerUnknown's Battleground's (PUBG) game in China. 40% of the game's playerbase originates from China anyway, and it might do the playerbase good to have home-run servers with little lag.

Riot Games was acquired by Tencent in 2015. [Source: PCGamesN]

Revenue from smartphone gaming grew more than 80% year-on-year, revealing a booming market for mobile gaming in China. Tencent has mentioned that they would be looking into R&D to widen their mobile gaming portfolio. Tencent has expressed active interest in overseas expansion - they have investments overseas to help the transition when it happens, and one of the things they plan to move to foreign markets is mobile gaming. This is one area in which I feel pessimistic/unsure about, because I do not know how the Western audience is going to react to games that have mainly catered to a Chinese audience. The gaming market in the United States, for example, is still dominated by consoles (e.g. Playstation, Xbox) and PCs, although mobile-games like Clash of Clans have enjoyed international success (which is good news for Tencent, since they acquired the company that developed Clash of Clans).

[FINANCIALS]

The company has been in the spotlight recently for vastly outperforming third-quarter estimates. The company posted a 3Q2017 revenue of 65,210 million RMB, a huge 61.4% increase year-on-year from 2016's 40,388 million RMB. More than two-thirds of this revenue came from Value-Added Services, with the remainder coming from online advertising revenue, and other businesses including cloud services. Net income rose 67.4% from the previous year, and net profit margin has had a slight increase from 3Q2016. Tencent has recorded a great increase in Net Cash year-on-year, which might signal greater investments for the company in the near future. The debt/equity ratio has slightly increased from the previous quarter.

Unaudited income figures 3Q2017 [Source: CNBC]

[FUTURE PLANS]

Tencent has an extensive investment list, extensive enough that the company would not really be affected if a couple of them went under. Tencent has a decent amount of money invested in foreign companies (like SNAP, founder of Snapchat), and I believe they plan to use these investments to springboard their communication platforms, digital services, and online games into foreign markets. Once again, the question is will it pay off? Cross-cultural examples have been very clear indicators that what works in one country might not work in another. The Simpsons, for example, was a massive hit in the West, but received only a mild response in Japan. Some countries might be too paranoid to transition into a cashless society, thus nullifying the e-payment/mobile payment aspect that WeChat/Tencent offers. Additionally, WeChat has attempted to penetrate the messenger-app market in South Africa, but Whatsapp still remains the app of choice for messaging and communication. WeChat South Africa, however, is continuously forging partnerships and increasing advertising in the hopes of capturing more market share. 

Foreign risk aside, the Chinese middle class has experienced tremendous growth in the past few years, and estimates are optimistic that numbers will continue to climb as 2020 approaches. A larger middle class means more consumers who are able to spend money - as one of the largest service providers in China, Tencent stands to benefit from heightened consumer spending. The market in China has not been fully tapped yet; even if overseas aspirations are not realized, Tencent still has growth to expect at home.

In conclusion, despite all the risks, Tencent still has growth potential. As more quality-of-life enhancements are made available on their electronic platforms, and as their platforms possibly see more use overseas  (e.g. Malaysia, Singapore, etc), increased revenue from Value-Added Services can be expected. All things considered, there is still room for the stock price to move upwards within the next two years.

Until next time.

Creed