That tech goliath is Tencent Holdings (OTC: TCEHY); which effectively owns social media and online search in the People’s Republic of China. Now, Tencent is coming to America; and might be planning to challenge Alphabet (NASDAQ: GOOGL) and Facebook on their home turf. Tencent attracted a lot of attention in the U.S. by buying 5% of Elon Musk’s Tesla Motors (NASDAQ: TSLA) earlier this year and it might be planning more US investments.
Tencent’s Vast Media Footprint
Tencent’s potential value rivals that of Facebook because its’ WeChat messaging application has 937.8 million active users, Bloomberg reported. If that figure is accurate, only Facebook’s WhatsApp and Facebook Messenger have more users. Both WhatsApp and Messenger had around one billion users in January 2017, Statista data indicates.
Like Facebook Tencent owns more than one huge social network. In addition to WeChat it controls QQ with 868 million users and Qzone with 595 million users. Unlike Facebook; which operates globally, these users are concentrated in one country – China. If these figures are accurate Tencent has around one billion users with 2.4 billion active social media accounts.
Note: Statista estimated that WeChat had 889 million users at the end of fourth quarter 2017, so there is some controversy here. Even with the smaller number, Tencent has a vast social media footprint that can easily be harnessed for advertising, Fintech and ecommerce purposes.
Unlike WhatsApp, the monetization of WeChat is well under way. Tencent’s digital wallet; WeChatPay has 600 million active users according to Bloomberg. If that figure is accurate, Tencent’s ecosystem is three times larger than that of PayPal Holdings (NASDAQ: PYPL). Statista reported that PayPal had 203 million active accounts at the end of first quarter 2017.
Is Tencent Holdings Making Money?
Like Facebook, Tencent Holdings has vast potential but is it making money right now? The answer is yes, if its’ financial numbers can be believed.
Ycharts recorded the following numbers for Tencent Holdings on March 31, 2017:
$25.07 billion (€21.99 billion) in revenues. Those revenues grew by $7.42 billion (€6.51 billion) between first quarter 2016 and March 2017. Back in March 2016 Tencent reported revenues of $17.65 billion (€15.48 billion)
A net income of $6.868 billion (€6.02 billion). That income increased by $1.982 billion (€1.74 billion) during the 12 months that ended on March 31, 2017. Tencent reported an income of $4.884 billion (€4.28 billion) at the end of first quarter 2016.
A profit margin of 29.21%.
A free cash flow of $3.861 billion (€3.39 billion).
Cash and Short Term investments of $10.32 billion (€9.05 billion).
Assets of $63.24 billion (€55.47 billion).
$11.21 billion (€9.83 billion) in cash from operations. The cash from operations grew by $2.857 billion (€2.51 billion) between March 2016 and 2017. Tencent reported $8.263 billion (€7.25 billion) in cash from operations at the end of first quarter 2016.
$4.437 billion (€4.437 billion) in cash from financing.
An enterprise value of $334.78 billion (€293.63 billion) on July 7, 2017.
A market capitalization of $329.80 billion (€289.26 billion) on July 7, 2017.
Tencent looks like a cash rich company but these figures are questionable. Why did it report $10.32 billion (€9.05 billion) in cash and short-term investments when Facebook reported $32.31 billion (€28.34 billion) on the same day? This raises the possibility that Tencent Holdings is not making that much money.
Why Tencent Might not be making that Much Money
One problem might be that most of its users are Chinese peasants. The average yearly wage in China was around $9,950 (€8,726.93 or 67,569 Yuan) according to Trading Economics.
Even though Tencent has lots of users those users may not have that much money. Marketing to Chinese chicken farmers might create a vast footprint but generate little cash. This calls Facebook’s whole WhatsApp strategy of marketing to developing nations into question.
This is also why Tencent is interested in coming to America and possibly Europe. It needs to tap more advanced nations where the cash is. Another problem that Tencent faces is that lots of Chinese don’t trust it possibly because of the association with the Communist Party.
Many Chinese users go out of their way to avoid their government’s financial controls. Chinese own around 90% of the world’s bitcoin in an attempt to get around the rigid financial controls their government places.
Tencent recognizes this problem and is making major investments in blockchain technology. It has launched an effort to create a blockchain-enterprise platform called TrustSQL. TrustSQL would be a sort of Chinese ethereum, a major goal for it will be to develop investments and other financial products that can be sold through WeChat Pay.
Will Tencent Buy Twitter, Snap or Square?
Another way that Tencent can make money is to buy some American or European companies. An obvious target would be Twitter (NYSE: TWTR) which has 328 million users but loses money like crazy.
Twitter reported a loss of -$438.70 million (-€384.77 million) on March 31, 2017. It would also be fairly expensive with an enterprise value of $13.15 billion (€11.53 billion) on July 7, 2017. Twitter also has the added problem of declining revenues. It reported $2.53 billion (€2.22 billion) in revenues in December 2016 and $2.483 billion (€2.18 billion) in March.
Other potential targets include Snap (NYSE: SNAP), and Square (NYSE: SQ). Buying Square would give Tencent a U.S. financial services platform and entry into Fintech outside China. Like Twitter Square is losing money; it reported a -$89.82 million (-€78.78 million) in losses on March 31, 2017, so it might need a white knight.
An intriguing potential target for Tencent is Elon Musk’s privately held SpaceX. The rocket company plans to begin launching a network of internet providing satellites designed to offer worldwide broadband starting in 2019, The Verge reported. Getting on that would be a real coup for Tencent. This might be the real reason why Tencent invested in Tesla to get into Musk’s good graces and become first in line for the satellites.
Is Tencent Holdings The Google of China?
A good way to think of Tencent is as the Alphabet; a.k.a. Google of China, the company that likes to stay in the background and make money from small transaction fees.
Like Alphabet’s Larry Page and Sergey Brin; Tencent’s dual leadership team can be pretty secretive. Founder Ma “Pony” Haunteng (no relation to Alibaba’s Jack) and manager Martin Lau like to stay in the shadows. They also play a very long game like Page and Brin strategically investing in new technologies or ventures.
They’ve pulled back some investments and becoming more strategic in recent years. A recent purchase was the Finnish mobile game company Supercell Oy; which owns Clash Royale, reportedly Lau’s favorite game.
Is Tencent Coming to US Stock Exchanges?
So why is Tencent suddenly attracting so much attention in the U.S. One reason might be that it is coming to U.S. stock exchanges soon.
Such a move would make sense given the way Chinese stocks have been falling as the Dow Jones has been rising to new heights. It might give Tencent access to a lot more money and investment capital. Tencent might have an easier time tapping American investment banks if it were listed in New York for example.
This brings us to the question of whether Tencent would be a good investment for Americans? I would say yes; because its shares which trade in Hong Kong and Shanghai, rewarded investors with a 28.9% return on equity on March 31, 2017.
Tencent is also that rare animal a tech company that pays a dividend. Its shareholders were paid 7.84¢ (€06.9) on May 19, 2017.
If Tencent ever comes to American exchanges, it will be a good investment because of the dividend, the high return on equity and all the growth potential. If any Chinese company has the potential to grow into a tech giant rivaling Microsoft or Alphabet it’s Tencent Holdings.
A slightly different version of this story previously appeared at Market Mad House.