Tencent Holdings Limited (SEHK:0700) 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.

STOCK INFORMATION

1
TICKER SYMBOL: SEHK:0700
MARKET CAP: HK$ 1.48 Trillion (Updated 24 March 2016)
MARKET PRICE / SHARE: HK$ 158.00 (Updated 24 March 2016)
SECTOR: Technology
INDUSTRY:
Technology

THE BUSINESS

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.

KEY STATISTICS (FY2015)

Net Revenue: RMB$102.9 Billion
Total Assets: RMB$306.8 Billion
Earnings per Share: HK$3.10
Dividend per Share: HK$ 0.39
Net Income Margin: 28.0%
ROE: 28.8%

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.

Active users (Dec 2015):
– QQ IM: 853 million
– Mobile IM: 641 million
– Weixin & Wechat: 697 million

From FY2001 to FY2015, Tencent’s revenue and net profit have increased at an incredible annual growth rate of 73% and 76% respectively.

Tencent Revenue

We think that the Revenue graph above pretty much says it all.

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.

Think Google. When the company becomes a verb (of course you have to be associated with something positive!), they have to be doing something right. And this network effect works well when all stakeholders benefit. The chief obstacle for any good or service which uses the network effect is to get enough early users for this effects to take hold. 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.

Tencent Network Effect

And with close to a billion active users on QQ IM alone, that seems to be a rather respectable amount right there.

KEY RISKS

1. Too big to succeed?

Some investors are worried that Tencent might have grown too big for its own good. Valued at HK$1.4 Trillion at the moment, 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.

Some might also argue that the company is losing it focus as a technology company and been stretching their resources too thin. Furthermore, with about 700 to 800 million active users already on its platform, there is a question of how much growth is left for the company. No matter which is the case, over expansion is definitely a key risk for the company.

 

2. Overseas Expansion?

Tencent Holdings has predominately been a Chinese company operating in China. Now with the growth in its social media platform slowing within China, the company is looking for ways to expand outside of the middle kingdom.

However, without a proven overseas expansion history, how the company might perform in the oversea market is still yet to be seen.

THOUGHTS ON VALUATION

Tencent Holdings does not appear cheap from a traditional valuation point of view. The company is valued at more than 43 times its earnings and only offers a 0.3% dividend yield. Moreover, it is trading at more than 12 times its tangible book value.

From a valuation standpoint, the market’s expectation of the company certainly does not appear to be low.

LISTED PEERS

1. Alibaba Group Holdings
2. Baidu Inc
3. SINA Corp

INVESTOR RELATIONS

Investor Relation Material:
Annual Report
Financial Information
Address: Tencent Building, Kejizhongyi Avenue, Hi-tech Park, Nanshan District, Shenzhen.
Zip Code: 518057
Tel: 0755-86013388
Fax: 0755-86013399

TOP SHAREHOLDERS DIRECT INTEREST (24 March 2016)

1. Naspers Limited ~ 34.11%
2. Ma Huateng ~ 9.26%
3. The Vanguard Group ~ 1.72%

FINANCIALS

tencent IS

Morningstar – Income Statement

tencent BS

Morningstar – Balance Sheet

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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley’s personal capacity and do not in any way represent those of his employer and other related entities.

Disclosure: Stanley Lim owns Tencent Holdings.

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