How Tencent Makes Money

What Is Tencent?

You've probably heard a lot about Alibaba Group (BABA) and Baidu (BIDU). These are two of China's most well-known technology companies. While Alibaba is known for its focus on retail and e-commerce, Baidu is well-known for its artificial intelligence (AI) and specialty services, such as mapping and data storage. But there is another tech company that isn't always on investors' radars: Tencent Holdings.

Tencent is one of China's largest technology companies. Founded in 1998, the corporation is based in Shenzhen with offices across Asia, including Tokyo and Seoul, Amsterdam, and Palo Alto, California. The company's mission is to promote sustainability and innovation while helping shape the digital future of industries within the economy.

The company functions in a series of technology-related spheres, including video gaming, social media, entertainment, streaming and cloud services, and advertising. Some of its most popular offerings include its instant messaging platform QQ, digital content like Tencent Games and Tencent Pictures, and fintech offerings Weixin Pay and Credit Card Repayment. Tencent also focuses on AI and aims to be a leader in retail, health care, education, and transport.

Interested in learning more about this company? In this article, we break down Tencent's stock along with its financials, key businesses, and most popular offerings.

Tencent's Financials

Originally a private company, Tencent went public on June 16, 2004. The stock, which trades in Hong Kong dollars, was listed on the main board of the Stock Exchange of Hong Kong under the ticker symbol 0700. The initial public offering (IPO) was priced at HK$3.70 per share, with the expectation of raising HK$1.55 billion. The company's market capitalization was expected to range between HK$4.66 billion and HK$6.22 billion.

Share prices closed at HK$600 on May 7, 2021, and were up 4.9% on a year-to-date (YTD) basis. The company's market cap was HK$5.75 trillion and the average trading volume on that date was 25,1 million shares. Investors in the United States can also purchase American depositary receipts (ADRs), which trade under the ticker symbol TCEHY over-the-counter (OTC).

Tencent reports its financials in renminbi (RMB), the national currency of China. According to the company's financial reports, revenue and profits show a steady increase over the years. During FY2020, the company reported revenue of RMB 482,064 million, an increase of 27.8% from the previous fiscal. The company cited increased revenue from online gaming (29%), online advertising (22%), and fintech and business services (29%). Net income came in at RMB 122,742 million, an increase of 30.1% compared with the results for the previous year.

The company's financial results remain positive, despite challenges in the global economy and because of the COVID-19 pandemic. Tencent's management attributed its results during the "unprecedentedly challenging year" to the company's "focus on user value and technology innovation."

Tencent's Business Segments

Tencent's corporate structure is divided into six different groups. The company's products and services include instant messaging service, online media, wireless internet value-added services, interactive media service, social apps, online advertising, and cloud services. The company's business segments are listed in alphabetical order below.

Corporate Development Group

The Corporate Development Group researches and develops new businesses, including financial technology, advertising, and marketing. This includes Business Tenpay, China’s leading online payment platform, providing an integrated payment service for B2B e-commerce platforms.

Cloud & Smart Industries Group

This group caters to the company's internet and cloud services. This segment allows Tencent to put its footprint in the digital assistant space in a variety of sectors, including financial, retail, and health care:

• Smart Retail: Tencent gives users one-stop retail solutions and services. This is done by providing support through consulting, planning, pilot operation, and deployment services.
• Smart Healthcare: This division promotes technology and application innovation in health care. Through upstream and downstream partnerships, Tencent aims to improve medical services and efficiencies in diagnostics.
• Smart Transportation: Tencent combines internet capabilities with transportation through intelligence, mapping, social media, finance, among other capabilities in personal, shared, and public transit systems.
• Smart Education: This segment has more than 1.1 billion users who take advantage of the company's educational development systems, including connectivity, teaching, tutoring, research, and management for K-12, vocational schools, and lifelong learning programs.

Interactive Entertainment Group

The IEG oversees Tencent's interactive entertainment offerings, including its video games and online sports. Tencent Sports is among the offerings in this segment, which is reportedly one of China's largest sports media platforms. It is the exclusive broadcaster of national sports as well as international events, such as the French Open, Formula One, NBA, MLB, NHL, NFL games.

Platform & Content Group

PCG oversees Tencent's proprietary internet platform, integrating it with its social, content, and traffic platforms. This includes Tencent's social media, its app store, news, live streaming, and movies, including:

• QQ Instant Messenger gives users access to text messaging, video, and voice chat as well as online (offline) file transmission. QQ had 768 million monthly active user accounts (MAU) on smart devices as of March 2020.
• Qzone, on the other hand, provides personalized multimedia space exclusively owned by users, built around three major content categories. These include self-expression, content sharing, and peer interaction.
• Tencent Music Entertainment Group is made up of a series of apps with more than 800 million MAU. Features include online music, karaoke, and live streaming. The service had more than 40 million songs in its library as of the end of 2019.
• Tencent Pictures: Founded in 2015, this branch of the entertainment division provides video content. This segment covers everything from production to distribution and promotion. It is also responsible for copyrighting and licensing. Tencent Pictures owns a total of six studios.

Technology Engineering Group

This segment helps the company's operational platforms and is the provider of Asia's largest networking, devices, and data center. This segment is integral to the company's research and development (R&D) initiatives, including its AI and Frontier Technology units. Tencent aims to bolster through open-source collaboration and the development of new computing platforms. It also provides support for corporate and business innovation.

Weixin Group

This is a segment that is responsible for the company's Weixin business ecosystem. This includes fintech platforms. This group includes platforms like Weixin Pay and Weixin/WeChat.

Weixin Pay (known as WeChat Pay outside of China) is a mobile payment solution that operates in more than 60 different markets in 17 currencies. Weixin/WeChat was released by Tencent in 2011 and is among the world’s fastest-growing social apps, giving users messaging and communication capabilities along with gaming within a single app. The combined MAU of Weixin and WeChat were 1.2 billion as of March 2020.

Tencent's Recent Developments

The company announced a series of product enhancements and innovations during the 2020 fiscal year. For instance, Tencent's Video Accounts platform allows social media users and corporations to share videos publicly. Businesses can reach a wider audience and increase transactions with their customers. The company also enhanced the social experience for younger users through AI-powered gaming and video viewing capabilities through video calls.

Tencent also announced a series of advancements in its gaming segments, including the launch of the Call of Duty game in China and the distribution of more than one million Switch consoles to users by the end of the year through its partnership with Nintendo.

Innovation in the company's cloud and other business services continued during the year, leading to the development of a new generation in its Star Lake SA3 server. This allows the company to boost its capabilities for AI, security, network, and storage.

The company also announced an annual dividend payment to shareholders of HKD1.60. That's an increase from the previous calendar year, where shareholders received HKD1.20 for every share they owned.

The Bottom Line

China’s consumer spending and fast-growing internet reach and usage have added to Tencent’s success. The country's leadership has placed special emphasis on its technology and internet sector which has encouraged many huge rounds of investment in companies operating in the space. Overall, China’s political and economic focus on the sector combined with Tencent’s commitment to enhance its innovative capabilities should bring the best to its customers as well as investors.

The author has no holdings in the stocks mentioned.