Here’s something from TenCent management that speaks volumes about their future long-term goals: “Our decade-long investment in payments and cloud services illustrates how our strategy of allocating capital to a range of pre-revenue and investment-stage activities ultimately broadens our revenue streams and generates sustainable profit growth over the long term, from communications services to games, advertising, digital content services and now FinTech and Business Services. We continue to invest in emerging services and activities as, we believe, technology continues to provide new consumer and enterprise opportunities.”
China’s middle class is growing by leaps and bounds. The country now has the third largest household consumption rate valued at an estimated $4.4 trillion in yearly consumption capacity. Moreover, Asia has 4 billion consumers. That’s a huge business opportunity for consumer-focused brands. As millions and millions of consumers reach middle-class status, their consumption will rise and their loyalty to their favorite brands will gather momentum. Tencent, is not a household brand in the U.S. but it certainly is in China and across Asia. Ten-Cent is headquartered in Shenzhen, China. Essentially, an investment in Tencent is like buying stakes in Facebook, WhatsApp, Amazon, AWS, PayPal, Netflix, Google for Ads, Spotify for music, Riot Games(League of Legends), Slack for collaboration and Nintendo, all in a single platform business. They own stakes in American video game maker Activision (5% stake) and EV car manufacturer Tesla (5% stake). They also own 40% of Epic Games which is the owner of Fortnite, an enormous video gaming phenomenon.
From a factor scoring perspective versus the other 199 brands in the brands index, here’s where TenCent scores well:
98% for 3 year sales growth
79% for high ROE
83% for low debt to enterprise value, a quality measure
92% high 1 year sales growth
86% for high overall operating margins
93% for projected dividend growth
I Love TCEHY. They participate in so many of the important trends happening in China and across Asia: Fintech, mobile payments, mobile messaging, E-Commerce, video gaming, advertising, social networking, etc. TenCent has so many stakes in companies it’s hard to keep track. In good times that’s a benefit, in bad times that could be a drag but an allocation in TCEHY stock offers a lot of leverage to the innovation that’s happening in China and across Asia. Consider this from EMQQ ETF provider: Tencent invested in more than 700 companies. Among the 700 companies, 63 are now listed, and 122 are unicorns with market capitalization or value of more than $1 billion. During 2018, 16 of the invested companies went public, including the much-publicized Tencent Music Entertainment Group (TME). The combined total market capitalization of companies in which Tencent holds more than 5% now exceeds $500 billion. Tencent’s jewel for video gaming is its 40% stake in Epic Games, creator of Fortnite. “Investment” is a core strategy for Tencent. Investment allows Tencent to focus on their platform and business to provide better services for partners and investment companies. The company cited its investments in several companies to create Tencent Video, still a unit within Tencent, as well as investments that helped to create WeChat Pay, a leading Chinese online payment platform.
TenCent’s ultimate goal: First and foremost is creating an open and fair platform in our business so that everyone can achieve the highest value through their excellent ability. In that regard, the company places creating user value as a paramount concern. Second, it aims to build the best team to identify and execute its investment strategy. Third, since many of these are emerging ideas, there is a focus on avoiding pitfalls such as excessive discounting and subsidies. Fourth, choosing its investors wisely. Finally, aims to always put the interests of the user over the company’s.
The last few quarters have been a bit noisy and this quarter in particular was not as clean as Alibaba’s but I love both stocks long-term. My position in BABA is slightly larger than TenCent’s given the bigger opportunity in E-Commerce I see. BABA just offers a more direct way to gain access to that theme. Back to TenCent. The company is a cash cow, is involved in every major theme in China, is dominating social with WeChat and has significant stakes in soo many important consumption-focused businesses. The stock had a nice pullback with the China market and has been recovering of late but still well off the highs. The Chinese economy has clearly cooled off but make no mistake, their economy will be larger than ours in the not too distant future, the population is 4x that of the U.S. and they are just getting started with the conversion from a manufacturing base to a services, domestic consumption base. Owning the brands that are leaders with consumption and particularly, E-Commerce should offer a wonderful long term investment experience. Buy the dips in this great and diverse Chinese brand.
Great quote from BrandFinance:
“At US$50.7 billion, WeChat is a rising star, having lifted its brand value 126% over the previous year. Its influence is reflected in the impressive way in which the brand has successfully created a digital ecosystem for its 1 billion Chinese users who use the platform every day to instant message, read, shop, hire cabs, and more. WeChat is the jewel in the crown of Chinese tech giant Tencent, which ranks 21st, holding a brand value of US$49.7 billion. ”