TENCENT HOLDINGS LIMITED

Business Summary

Tencent Holdings Ltd. (HKG: 0700) is not your normal company. At any time, this is a company that is always looking for areas to grow and evolve.

Tencent started off as an internet-service related company but has undergone major changes. As of today, it is a multinational conglomerate with plenty of business verticals.

Tencent is the world’s largest video game company and one of the world’s most financially valuable companies. It is also one of the world’s largest social media companies and one of the world’s largest venture capital firms. Example of its services includes social network, music, web portals, e-commerce, mobile games, internet services, payment systems, smartphones, and multiplayer online games.

Tencent was founded in November 1998, under a group of founders. They are Pony Ma (Ma HuaTeng), Zhang Zhidong, Xu Chenye, Chen Yidan & Zeng Liqing. Back then, the first product of Tencent is QQ, which is a messaging software and website portal predominantly used within China. 

QQ Penguin. Source: Wikipedia

It wasn’t until the year 2011, Tencent launched its killer product – Weixin or more commonly known as WeChat. WeChat slowly became the de facto app for chat, payment and also many other usages.

WeChat app logo. Source: Wikipedia

Dividends (3/5): ⭐ ⭐ ⭐ 

Value (3/5): ⭐ ⭐ ⭐ 

Financials (4/5): ⭐ ⭐ ⭐ ⭐

Growth (5/5): ⭐ ⭐ ⭐ ⭐ ⭐

Business (5/5): ⭐ ⭐ ⭐ ⭐ ⭐

Reference: (i) MyKayaPlus Metrics Definition (ii) MyKayaPlus Metric Evaluation Scale

Updated: 26.08.2020

Business Vertical 1 – Communication & Social

WeChat

Wechat is arguably one of the most complete software. Because it is not just a messaging app. Over the years, it has morphed and grown into an app which most of the people in China use for various functions.

The WeChat ecosystem. Credits: WeChat

Below is just a brief summary of what Wechat’s current functions are:

  • Messaging: provides text messaging, hold-to-talk voice messaging, video calls and conferencing, video games.
  • Public accounts: similar to a social media account. Public accounts allow account owners to broadcast contents, push feeds, which is similar to a verified account on Facebook.
  • Moments: WeChat’s brand name for its social feed of friends’ updates. “Moments” is an interactive platform that allows users to post images, text, and short videos taken by users. It also allows users to share articles and music.
  • WeChat Pay digital payment services: WeChat Pay is a digital wallet service function within WeChat, which allows users to perform mobile payments and send money between contacts.
  • Enterprise WeChat: In essence WeChat for work, which allows users and employers to segregate personal WeChat from WeChat functions used at work.
  • Mini Program: Just like the name implies, a Mini Program is an app within an app. Business owners can create mini-apps in the WeChat system using JavaScript plus a proprietary application programming interface (API). Users may install these inside the WeChat app. With one Mini Program, consumers could scan the Quick Response code using their mobile phone at a supermarket counter and pay the bill through the user’s WeChat mobile wallet.

In a nutshell, WeChat provides the most holistic and complementing platforms ever to its users. Hence, Chinese citizens rely heavily on WeChat for their daily lives. Be it from messaging, payment, investments, donation or even booking flight tickets.

With a rapidly growing user base, advertisements also slowly found its way within WeChat’s interface. This also slowly contributes to WeChat’s revenue.

QQ

QQ was actually the first creation of Tencent that really started the whole Tencent momentum. But the creation of WeChat somehow impacted QQ’s position. QQ started off as a website during a time where computers were not readily abundant in China.

Of course, came a sudden rise of affordable smartphones by Huawei Technologies Co., Ltd., Guangdong Oppo Mobile Telecommunications Corp., Ltd, Vivo Communication Technology Co. Ltd. Hence, with the sudden affordability of a smartphone, the entire community became more reliant on mobile internet for usage and consumption. This is the moment when WeChat actually eclipses QQ.

Nevertheless, QQ also underwent several changes to suit the mobile landscape. Hence, it is now an app that provides online social games, music, shopping, microblogging, movies, and group and voice chat software. QQ’s recent pivot is to enable online classroom learning to facilitate learning and education during the COVID-19 pandemic. 

Source: QQ on Google Playstore

Business Vertical 2 – Games

Tencent’s first foray into online games was back in 2004. But it was not until 2007/2008 their direction accelerated. Slowly, Tencent also ventured into game development and also publishing. 

Today, Tencent is easily one of the biggest gaming companies due to its investments in multiple gaming companies. Below is the list of gaming companies, stakes and game series.

Riot Games – 100% stake
Source: Riot Games, League of Legends

Riot Games, Inc. is an American video game developer, publisher and esports tournament organizer. It is best known for League of Legends, a Multiplayer Online Battleground Arena (MOBA) game. Tencent acquired 93% of Riot in 2011 and the remaining 7% in 2015. 

Although Tencent allows Riot to steer and manage their company with free reigns, it was not always smooth sailing. Back then, League of Legends was still an online PC game, which was not serving the majority population in China on mobile. A request to make a mobile compatible MOBA fell on Riot’s deaf ears and Tencent went on to develop WangZheRongYao (王者荣耀) and Arena of Valor.

Only after seeing their market share on games facing disruption, Riot Games eventually develop LOL on mobile.

Epic Games – 40% Stake
Source: Epic Games, Infinity Blade, Unreal Engine & Fortnite

In 2012, Tencent continued investing in other promising gaming companies. This time, it’s Epic Games, Inc. Just like Riot, Epic is a game developer and publisher. It is well known for its gaming engine development, Unreal and for hit games like Fortnite. 

Fortnite is a battle royale style game where players have to emerge as the eventual winner. It slowly became one of the hottest games and a global phenomenon, especially in the EU and America region.

PUBG and Fortnite Statistics. Source: Statista
Bluehole – 11.5% Stake

While the name of this company might not be familiar, the game under this company should be. Player Unknown Battle Grounds, or more commonly known as PUBG, is the crown jewel game under Bluehole. 

PUBG’s main players are more towards Asian and is also a Battle Royale game. So with both PUBG and Fornite, Tencent’s gaming companies under its investments solidifies its grip on 2 of the most popular games in the world.

PUBG. Credits: PUBG
Other Gaming Companies

Of course, the list of gaming companies that Tencent has a stake in could be endless. We shall consolidate the rest of Tencent’s stake in other gaming companies together with some flagship game examples.

  • Ubisoft Entertainment SA – 5% stake: Game franchises of Assassin’s Creed, Watch Dogs
  • Activision Blizzard, Inc – 5% stake: Game franchises of World of Warcraft, Call of Duty
  • Grinding Gear Games – 80% stake: Path of Exile
  • Supercell – 84.3% stake: Clash of Clans
  • PlatinumGames Inc. – Undisclosed: MadWorld, Infinite Space
  • Yager Development GmbH – Undisclosed: Dreadnought, Spec Ops
  • Frontier Developments plc – 9% stake: Planet Zoo, Jurassic World Evolution
  • Kakao – 13.54% stake: South Korean internet company and also PUBG publisher in South Korea
  • Paradox Interactive AB – 5%: Hearts of Iron
  • Fatshark – 36%: Warhammer series
  • Funcom Oslo AS – 100%: Age of Conan, Anarchy Online
  • Sharkmob – 100%: No games yet

Business Vertical 3 – Digital Content

Tencent Video. Credits: Tencent Video

Tencent’s digital content business is mainly in long and short videos. Like Netflix, Tencent video focuses on developing original content and supporting original programs, home-made drama, micro-movie, and short film contest.

Tencent Video’s content is a wide array, ranging from reality shows, dramas and also movies. It also runs on a subscription model, where subscribers get access to all contents.

Tencent is also the exclusive subscription for the National Basketball Association (NBA) streaming provider in China.

Credits: Tencent Video Website

Business Vertical 4 – Online Advertising

Tencent’s various apps and platforms also provide multiple channels for online advertising opportunities. QQ, Tencent Video, Tencent News and WeChat have 1.1 billion users, which provides a reach of 90% of China’s population.

Sources: adchinoa.io

Business Vertical 5 – FinTech

Credits: WeBank

Leveraging its holy grail app WeChat, Tencent also made WeChat into an app that processes payments. In fact, entire China saw a switch so drastic that within less than 10 years, almost 83% of China switched from non-mobile payment to mobile payment. 

Every time WeChat facilitates payment via the millions of mini-programs within its ecosystem, it also earns revenue that contributes to its FinTech business vertical. Plus, the FinTech segment has also ventured into wealth management under LiCaiTong.

Of course, as FinTech slowly becomes the next growth phase of Tencent, plenty of eyes are also focusing on its digital bank, WeBank. WeBank offers microloans (Weilidai) and has been in the market for around 5 years.

Mobile payment in China – Source: Walk The Chat, Ipsos, chart by Daxue Consulting

Business Vertical 6 – Cloud & Business Services

Credits: Tencent Cloud

Cloud is the norm when it comes to data storage and security. While there are plenty of players in the West that dominate the cloud, over in China, only 2 companies are a major force. Like its FinTech, Tencent’s competitor is none other than Alibaba Group Holding Ltd

Tencent cloud not only provides a platform for enterprises but it also currently synergizes with Tencent’s existing other apps and services. Example, WeChat, Tencent Video, and other of its services are running on Tencent Cloud. In short, we are looking at a tech conglomerate that is self-sustainable and its services working synergistically with each other.

Management And Major Shareholders

Clockwise from top left: Zhang Zhidong (Tony Zhang), Ma Huateng (Pony Ma), Chen Yidan (Charles Chen), Xu Chenye (Daniel Xu) & Zeng Liqing (Jason Zeng) 

Tencent was founded by Ma Huateng, Zhang Zhidong, Chen Yidan, Zeng Liqing and Xu Chenye in the year 1998.

Today, only Pony Ma and Daniel Xu remain as a part of the executive team. Pony Ma currently helms as Chairman and Chief Executive Officer of Tencent. Daniel Xu serves as the Chief Information Officer. Tony Zhang, Charles Chen and Jason Zeng remain as advisor emeritus. Previously all 3 co-founders served as Chief Technology Officer, Chief Administration Officer and Chief Operating Officer.

As a company with so many applications and offerings, Tencent also boasts a huge management team. Each segment is lead by an experienced individual, who usually has at least 10 years of experience with Tencent Group.

Notable mentions are Mr Lau Chi Ping, Mr Ren Yuxin, Mr Zhang Xiaolong, Mr James Mitchell, Mr Tong Taosang and Mr Lu Shan.

Tencent’s largest shareholder is Naspers Limited, a South African Internet group. Naspers purchased their stock from early investors including PCCW and IDG Capital. The 2nd largest shareholder is Ma Hua Teng himself with a stake of 8.4%. The other major shareholders are The Vanguard Group, Inc., BlackRock Fund Advisors and also Temasek Holdings, Singapore’s sovereign wealth fund.

Source: MarketScreener.com

Financial Performances

With its multifaceted business segments and shrewd investments, Tencent’s growth shows no sign of stopping. It’s FY 2019 revenue is at RMB 377 billion, while net profit is at RMB 93 billion. Both revenue and profit have growth at a 10-year CAGR rate of 34.38% and 27.66%. 

The major contribution of its revenue is the Value-added Services segments, which include online games, social network, video and music subscription. 

Of course, the major gleam of Tencent’s VAS business is potentially overshadowing its next growth catalyst, which is the FinTech and business services. WeChat Pay is one of the defunct peer-to-peer payments, seeking to improve its market share. Of course, competition is stiff as the market leader is Alipay. But FinTech growth and margins have been showing improvement, so do keep an eye on this segment.

The rest of the revenue comes from online advertising, movie distribution and other small business segments.

Tencent’s return on assets and equity is also a surprisingly high levels. Tencent’s ROA for FY 2019 is at around 10%, while ROE is at 21.4%. Both ROA and ROE are trending downwards might alarm shareholders, but this is due to the increase in retained earnings. 

Overall, Tencent’s past growth and current prospects are nothing short of spectacular.

Balance Sheet

YearAssets (RMB Million)Liabilities (RMB Million)Equity (RMB Million)Current Ratio
2019953,986465,162488,8241.06
2018723,521367,314356,2071.07
2017554,672277,579277,0931.18
2016395,899209,652186,2471.47
2015306,818184,718122,1001.25

Sometimes, it is just pure amazement on how tech conglomerates can still grow at breakneck speed. As of  FY 2019, Tencent’s total assets are at RMB 954 billion. Liabilities and equity are at RMB 465 billion and RM 488 billion respectively. 

Looking more in-depth, Tencent’s surge in asset contributions is from its investments in associates. This is due to Tencent is reinvesting a major chunk of its profits, which makes it a venture capital on top of a tech conglomerate. 

Of course, its year on year increase in profits means that its retained profits surge in tandem with total assets. Hence, this explains the ROA and ROE downtrend is not due to underperforming results. 

Cash Flow Activities

Operating cash flow is rising in tandem with Tencent’s surging profits. Most notably, almost close to 100% of Tencent’s operating cash flow flows back to investing. Tencent’s 2 major cash outflows in investing activities are the purchase of property, plant and equipment and acquisition of investments in its associates. 

Combining all 3 statements together, Tencent’s financials are superb and the company is very well run. Furthermore, management is doing a fantastic job as venture capital in investing its retained earnings. 

Hence, the company not only has a fortress balance sheet. It is also able to compound shareholder’s capital. 

Price

MyKayaPlus Verdict

Tencent is one of a kind company in the league of its own. This is because its applications and services that are synergistic with each other. Also, the track record of their business and earnings, on top of the shrewd investments, does point to untold growth stories. Overall, the entire ecosystem of its core business, management and investments are perfect.

But it does not come cheap, as all great companies are. It currently trades at a trailing P/E of 45x. But with its growth coming from its strategic investments and company initiatives, could this valuation be reasonable for bullish investors?

Food for thought!

DISCLAIMER
The information available in this article/report/analysis is for sharing and education purposes only. This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned; nor can it be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. If you need specific investment advice, please consult the relevant professional investment advice and/or for study or research only.
No warranty is made with respect to the accuracy, adequacy, reliability, suitability, applicability, or completeness of the information contained. The author disclaims any reward or responsibility for any gains or losses arising from direct and indirect use & application of any contents of the article/report/written material

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