While Chinese companies such as Alibaba Group Holding Limited (BABA) and Baidu Inc. (BIDU) are much covered in the press and talked about in the U.S., there is a Chinese major which continues to be overlooked by mainstream investors despite the huge potential it has shown and continues to offer.

Tencent Holdings Limited is one of the top companies around the world in terms of market capitalization. Its stock price is up 26.4% year-to-date and it currently has a market capitalization of $234.765 billion (HK$ 1.836 trillion). Founded in 1998, Tencent is a dominant player in the Chinese online and mobile market. Over the years its “user-oriented operating strategies” have ensured that it remains on a healthy growth trajectory. Tencent Holdings Limited went public on the main board of the Hong Kong Stock Exchange in June 2004, and is listed over-the-counter in the U.S., trading under the ticker TCEHY. (For related reading, see: Why Tencent Is Paying $6.6B for the Largest Gaming Acquisition.)

Numbers

Tencent’s revenue and profits have steadily increased. During FY2015, the company reported revenue of RMB 102,863 million, an increase of 20% vis-à-vis the previous fiscal. It reported a profit of 28,806 million, an increase of 21% compared with the results for the previous year. 

(RMB Million)

FY11

FY12

FY13

FY14

FY15

Revenue

28,496

43,894

60,437

78,932

102,863

Net Income

10,203

12,732

15,502

23,810

28,806

Tencent has continued to report robust numbers during FY2016 so far. During Q3 FY2016, it reported revenue of RMB 40,388 million ($6,048 million), an increase of 52% year-on-year. The profit attributable to equity holders of the company was RMB 10,646 million, an increase of 43% year-on-year. Tencent spent RMB 9,039 million on research and development during FY2015 vis-à-vis RMB 7,581 million in 2014. (For more, see also: Qualcomm, Tencent Join for AR, VR Venture.)

Business Highlights

Tencent’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 leading and most popular internet platforms in China are:

  • QQ (QQ Instant Messenger) is a one-stop solution for all internet based instant messaging needs. It supports text messaging, video and voice chat as well as online (offline) file transmission. Monthly active user accounts (MAU) of QQ was 877 million while Smart device MAU of QQ was 647 million on September 30, 2016 (Q3 2016). Peak concurrent user accounts of QQ (Q3 2016) was 250 million.
  • Weixin/WeChat is one of the world’s fastest growing social apps released in 2011 by Tencent. The platform brings together messaging, social communication and games all within one easy-to-use app. Combined MAU of Weixin and WeChat were 846 million, an increase of 30% year-on-year at the end of Q3 2016.
  • QQ.com is China's largest portal in Chinese integrating news, interactive communities, entertainment products and widely used basic services. 
  • QQ Games is a casual game product introduced in August 2003. “With its ‘Green, Healthy and Quality’ philosophy, QQ Game has extended and improved traditional popular entertainment game content to the Internet.” At the end of September 2016, "Honour of Kings" surpassed 40 million daily active users, a new record among non-casual smart phone games on its platforms. There lies great opportunity for this segment as China’s online gaming revenue is expected to break through RMB 200 billion in 2017.
  • Qzone is the next-generation personalized multimedia space exclusively owned by users, built around three major content categories: self-expression, content sharing and peer interaction. MAU of Qzone was 632 million while Smart device MAU of Qzone was 584 million.
  • Tenpay is China’s leading online payment platform. It provides an integrated payment platform providing B2B, B2C and C2C solutions. As per iResearch estimates, “Tenpay accounted for 20% in China’s online payment market in 2015 because it built open cooperating platforms, increased payment scenarios based on WeChat and QQ, integrated mobile payment with online payment to provide comprehensive financing services for clients.”

The Bottom Line

China’s consumer spending and fast growing internet reach and usage has added to Tencent’s success. Chinese 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.

Market capitalization and year-to-date returns as of November 27, 2016. The author has no holdings in the stocks mentioned. 

 

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