Originally published by BetaShares
Ask almost anyone young or old in the western world if they are familiar with Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL), or Facebook (NASDAQ:FB) and you would most likely get a resounding “yes!” However, if I were to ask those same people if they were familiar with Tencent (HK:0700), the answer would probably be “Ten who?”
So, who exactly is Tencent and why haven’t you heard of it?
Tencent is a Chinese digital media and telecom conglomerate with over 30,000 employees. It is China’s biggest and most valuable technology company, currently worth ~US$460 billion, making it the sixth largest company in the world and currently approximately the same size as Facebook. Companies such as Facebook and Google are banned in China, so this helps local players dominate within the country without the same threat of global competitors, whilst also allowing them to expand into the western world.
Let’s learn more about this fascinating company…
Social Media
You may be familiar with WhatsApp and you may even use it on your phone as your primary messaging tool, but are you aware that in Asia by far the dominant messaging app is WeChat? WeChat is owned by Tencent and has almost a billion monthly active users. However, unlike WhatsApp, which is primarily just a messaging app, WeChat has become an “all in one” super portal which serves to keep users on the platform and removes the need to visit other sites – not owned by Tencent. Currently, WeChat allows mobile payments (e.g. instead of using PayPal) and can help assist in hailing taxis (e.g. instead of using Uber), watching videos (e.g. instead of using YouTube), dating or “hooking up” (e.g. instead of using Tinder) and ordering food (e.g. instead of using UberEats or Deliveroo). This is in addition to the 900+ million users that use QQ, which is also owned by Tencent, and which has many of the same features as WeChat (and more!), but is considered more as a desktop messenger, whereas WeChat is very much a mobile application.
Gaming and eSports
Gaming enthusiasts all over the world are playing games made by companies owned by Tencent. Gaming companies such as Riot Games (maker of League of Legends), Activision Blizzard (NASDAQ:ATVI) (maker of Overwatch and Destiny), Supercell (maker of Clash of Clans), and a 40% stake in Epic Games (maker of Fortnite which is the hottest video game out right now), makes Tencent the leader in the ever-growing sector of mobile gaming and eSports.
Plans to expand to the US and the rest of the world
Tencent continues to find ways to grow internationally. For example, the company recently acquired a 12% stake in Snap Inc (NYSE:SNAP) (the parent company of SnapChat) and also holds a 5% stake in Tesla (NASDAQ:TSLA). It has also announced plans to conduct a US initial public offering (IPO) for its streaming music unit Tencent Music Entertainment (TME), with reports suggesting it could raise $1Billion and value the company at US$30 Billion, which would rival Spotify’s value (which at the time of writing is US$31 Billion). Interestingly, Tencent owns a 7.5% stake in Spotify, making it the third largest shareholder behind the founders. Spotify and TME swapped equity stakes in each other last December, so Spotify also has a 9% holding in TME. This is considered beneficial for both companies, as it gives them the opportunity to invest in the long-term potential of the music market outside of their current regions.
Tencent’s X-Factor
Companies such as Google, Facebook and Amazon generate a disproportionate amount of earnings through advertising or physical goods. However, Tencent only generates 17% of its revenue through online ad sales compared to Facebook’s 97%. Instead, Tencent’s main source of revenue is online gaming – selling everything from the game itself to virtual goods such as online gaming avatars, and even clothes for those avatars. Tencent is also looking at expanding into other areas of technology, announcing plans to open artificial intelligence labs in Shenzhen and Seattle and looking to develop a countertop smart speaker, like Amazon’s Alexa or the Google Home. Should at least one of these ideas take off, it could well improve Tencent’s brand awareness globally.
How to gain exposure to Tencent?
Tencent is listed on the Hong Kong stock exchange and trades on the Nasdaq OTC market. So, unless you are buying direct on those foreign markets, it can be difficult and expensive to gain access.
It stands to reason that technology should continue to be a long-term thematic and help drive growth in the global economy. The sizeable underweight of technology in the Australian market may well hurt relative performance of the market going forward, making Asian technology a potential complement to many Australian investors’ portfolios without doubling up on the big tech names you may already have through a Nasdaq or US sharemarket exposure.