Deep Dive into Tencent

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9 min readDec 19, 2021

Macro Background

Before I start sharing about Tencent itself, let’s have a look at the China’s internet demographic. As shared in China Internet Report 2021, there are about 1.4 Billion Population in China of which 68% of them are both internet & mobile internet users (980+ Million users) and that is 3x the entire US Population. In short, it is important to understand that this is a super massive market which is growing at a very fast pace (85 Million YoY growth from 2020 to 2021 in Internet Users).

In the recent years, China has also experienced historical high of investment activities, similar in comparison to the US market. When some companies are putting on hold their investments due to various reasons such as the Covid pandemic, Tencent did completely different by investing more aggressively and maintain its leadership in number of investments in 2020.

And of course not to forget, the China regulators have started a series of regulatory supervision especially on the Big Tech like Tencent and Alibaba to ensure the country’s biggest internet companies to focus on real innovation and not monopolistic activity within the country. The share price of the most Internet companies had a really bad time throughout the year since late 2020 when Ant Financial was stopped from IPO listing. If you have invested in some China companies since then, your portfolio may look awfully red compared to the US stock market performance.

At the time of writing this article, Tencent’s share price has dropped by 50% to about 400+ HKD at a 500+ Billion Market Cap. From a valuation perspective, it is currently trading at about 18x PE TTM which looks attractive when we look at the Tencent’s 5 Years PE trend. Nevertheless, we should always look at the business model of the company to see if there is still any potential growth that can contribute to the company value.

Introduction

Personally I am amazed on how fast have Tencent grows in the last 10 years and how it becomes one of the most important apps that you would have if you are living in China. WeChat (or Weixin) would be the Super App that you would related to when you think of Tencent, but Tencent’s digital ecosystem is far more than just that. As the king of Super App in China, there are now 1.26 Billion Monthly Active Users (MAUs) which means that almost 8 of 10 people that you meet in China uses WeChat. From communication, socialising and all the way to payment transactions, the digital ecosystem serves every single need of the users.

WeChat Mini Programs

From just being an instant messaging app, WeChat has evolved in multiple dimensions that connects people lives to their other needs. The Super App provides access to their massive user base to various mini programs with products, content and services (2020 Annual Transaction Value has grow more than 100% YoY). Instead of downloading from an official app store or website, users access mini programs by searching on WeChat, scanning QR codes or receiving mini program status updates in chats. It optimises users’ experience because they never need to wait for app installation.

Mini programs are easier for providers to develop in the initial stages. They can test market viability without a large investment and then consider further steps based on feedback later. Up to 2021, there are more than 4.3 million WeChat mini programs attracting around 410 million daily active users. Practical mini programs are popular and cover almost all the necessities of daily life: transportation, food, time management, video watching, online shopping, photography and more.

If WeChat mini programs are so useful, a common question would be whether it can replace the native apps? According to the WalkTheChat, native apps and mini programs appeal to different populations. In particular, WeChat mini-programs are especially convenient for users in lower-tier cities with cheaper data plans and are more reluctant to download new Apps, or those who simply don’t have enough storage on the phone.

Using Pinduoduo as an example, 63.6% of the Pinduoduo mini program users come from Tier 3 or smaller cities. A similar trend can also be observed when comparing the native app and WeChat mini program of services such as JD, Weipinhui, Meituan and etc. If you are targeting users in lower-tier cities, WeChat mini programs could be more effective in targeting users with lower purchasing power (who might be reluctant to install new Apps due to cheap phone plans for instance).

With increasing engagement and a growing number of users, WeChat mini program is definitely a strong tool for brands taking their first step into China, and looking for a social-driven ecosystem to initiate or accelerate their momentum. To align with the country’s common prosperity direction, I believe that Tencent will able to assist China businesses in building their own digital channel and customer relationships to drive sales.

Top Leading Investor in China

After so many years, Tencent has grown into a behemoth Venture Capitalist funding many great companies using their ever growing cash flow. Today, Tencent has has spent over $ 23.15 Billion for 25 acquisitions and 609 investments. Tencent has invested in multiple sectors such as Biotech, Blockchain, Medtech, AI, Food Delivery, Fintech, Entertainment, E-commerce and many more.

You could be wondering what Tencent has invested over the years and how’s the performance of their investment portfolio. The good news is that Tencent investment has performed exceptionally, as you are indirectly owning the top performing stocks in the world such as Tesla, Sea Limited, JD.com, Pinduoduo, Futu, Snapchat, Epic Games, Meituan, Gojek, Nio and etc if you are a Tencent Shareholder. Looking at the their investment result, I am very confident that Tencent will able to continues to create strong investment values for the shareholders from their future investments.

Gaming

Another big word that we always connect to Tencent is Gaming, they are one of the world’s largest gaming company and continuing to grow organically through both investments and acquisitions. In May 2021, Tencent has closed 51 video game related deals, already more than the 31 game related deals closed in the whole of 2020 and over 5x more the number of game related deals closed in 2019.

However, Tencent has faced notable competition from tech giants such as Alibaba and ByteDance over the past year asides facing the tight regulation and restriction on the gaming industry from the China government. While China is still the largest gaming market in the world with 33% of PC and mobile games revenue derived from mainland China gamers, Tencent wants to play the game differently by aiming to be a global giant and set a target to have half of its players overseas.

Nearly half of the 51 investments in 2021 are in companies with experience developing PC and console games. These investments will help Tencent gain footing in the domestic PC games market, which is set to rebound from 2022, as well as in the global console and PC market. Tencent aims to create and support more cross platform and AAA games that can compete in the high-end space. The foreign investments in PC and console games companies, such as Fatshark, Bohemia Interactive, Dontnod Studios, Klei is both to utilize their expertise in PC and console game development and to bring their games to China.

FinTech and Business Services

When we look at the revenue by business segment, the fintech & business services segment is definitely one of the fastest growing segment in the last 5 years. Although there are not many information on the fintech business, WeBank aims to build the first ever distributed banking system based on cloud computing technologies and blockchain.

China is the world’s second-largest economy and has four of the five largest banks in terms of assets, but it still has the world’s largest unbanked population: 225 million Chinese adults currently lack a bank account. Small- and medium-sized businesses find it difficult to get access to financing, which forces them to turn to shadow banks or alternative sources of funding.

Back in December 2014, Tencent launched WeBank to address the gap in the China’s banking market, with the vision to provide “affordable, accessible, appropriate, and sustainable” services for consumers and businesses whose financial needs are not met by incumbent banks. WeBank leveraged on Tencent’s ecosystem, technology capabilities, and R&D resources to develop a disruptive credit profiling system and a new digital proposition that could scale up rapidly and sustainably and generate healthy profits while driving financial inclusion.

As you may not know, China’s Cloud Service Industry is growing at a rapid rate and it is currently dominated by few main players like Alibaba, Baidu, Tencent, Huawei which makes up close to 80% of the entire market share. According to data from Canalys, mainland China’s cloud infrastructure services spending increased by 43% year on year to US$7.2 billion in Q3 2021.

In 2020, the overall market size of global public cloud services (IAAs / PAAS / SaaS) reached US$312.42 billion, with a year-on-year growth of 24.1%, according to IDC. IDC predicts that the global share of China’s public cloud service market will increase from 6.5% in 2020 to more than 10.5% by 2024.

From the world view below, we can see that Tencent is working hard to build its global cloud presence as its infrastructure is currently available in 27 regions globally. As the cloud service industry is growing, I think Tencent has a big role to play in this cloud business and it could possibly be one of the strong revenue stream for the company.

Metaverse

When the founder of Facebook announced in October that he was changing the name of the social-media network’s parent company to Meta Platforms, Metaverse becomes the most discussed term in the market. Metaverse is a combination of multiple elements of technology, including virtual reality, augmented reality and video where users “live” within a digital universe. At the same time, many companies in the US like Unity, Nvidia, Roblox and many other have declared their intentions to join the Metaverse world.

Here’s what a Tencent-centric metaverse would look like: You design your 3D avatar on the QQ chat app and use it in live-stream calls with colleagues on Tencent Meeting. After work, your avatar pops into a game of PUBG Mobile and wins a ticket to a virtual concert on Kugou Music. Seeing conflicting schedules, you then sell the ticket on WeChat in exchange for a new haircut for your avatar the next morning. A scenario like this involves gaming, video streaming, social networking, e-commerce and money transactions — all made possible through Tencent properties.

As the world’s largest gaming provider, Tencent could be likely more ready for the metaverse in terms of technology infrastructure, but Beijing’s scrutiny over online content and data security could complicate things. Nevertheless, it is still the early stage for the Metaverse story and I look forward to how Tencent can participate and contribute to it.