Date
25 November 2017
Ma ''Pony'' Huateng, chairman and CEO of Tencent, speaks to reporters in Hong Kong following the firm’s 2014 results announcement on March 18. Photo: Bloomberg
Ma ''Pony'' Huateng, chairman and CEO of Tencent, speaks to reporters in Hong Kong following the firm’s 2014 results announcement on March 18. Photo: Bloomberg

Tencent can capture more ad revenues, mobile payments

Tencent Holdings (00700.HK), China’s biggest social network and online media firm, saw its shares soar 6.7 percent and hit new high on Thursday following a strong earnings report.

Around HK$9 billion worth of shares changed hands, 3.3 times the average daily trading seen in the past three months.

The internet giant announced that its net income rose 50 percent to 5.86 billion yuan in the fourth quarter of 2014. The company managed to maintain rapid growth despite its huge size.

Strong advertising growth on WeChat, and huge potential from mobile payment and WeBank look set to woo investors. Premier Li Keqiang said earlier that “Internet plus” model will drive the nation’s economic growth in the coming years. Tencent is a typical example of that model.

Revenue rose 23.6 percent to 20.98 billion yuan in the three months ended December. Gross profit margin hit 60.3 percent, up 8.59 percentage points compared to the last quarter of 2013.

And its instant messaging app WeChat reported a 41 percent jump in active users to 500 million. Given the huge number of active users, investors expect new growth areas after mobile games.

For example, advertising revenue on Moments looks set to post strong growth. Tencent has already started to test ads on WeChat with 10 advertisers so far this year. And the company intends to focus on leveraging social media data to place ads at targeted groups.

Last year, its online advertising revenue soared 65 percent to 8.31 billion yuan from a year ago. In the fourth quarter, ad revenue jumped 75 percent to 2.63 billion yuan. Tencent said earlier that it is taking inspiration from Facebook in expanding the advertising revenue.

Currently, Facebook generates 95 percent of its revenue from advertising. But in the case of Tencent, advertising only makes 11 percent of the firm’s revenue. If the Chinese firm’s Moments advertising tests succeed, there will massive growth potential in the future.

The company intends to step up investment on video content. It has already signed some exclusive agreements with NBA, HBO and the Voice of China TV talent show, which will help boost the advertising revenue.

As key part of the marketing strategy in O2O business, Tencent has inked a strategic partnership to expand its mobile payment unit. That has motivated users to link their banking accounts with WeChat.

The business growth is reflected by the fact that the number users who used WeChat to give and receive “Red Envelopes” during the Chinese New Year Holiday soared 15-fold.

As of end of 2014, over 100 million users had linked their bank accounts with Tencent’s mobile payment system, which will pave the way for its future internet finance development.

The mobile payment market has huge growth potential. Tencent has struck strategic or investment deals with leading players like 58.com and dianping.com in order to enrich its eco-system and lay a solid foundation for future mobile payment growth.

Last year, China’s third-party payment market reached 5.99 trillion yuan in size, nearly four times the level in 2013. However, Alibaba’s Zhifubao had a 82.3 percent market share, while Tencent’s Tenpay only accounted for 10.6 percent.

This indicates that Tenpay has lot of room for growth. 

Also, the stock valuation remains attractive, with the current share price marking 34 times estimated 2015 earnings and 26 times the projected 2016 earnings.

This article appeared in the Hong Kong Economic Journal on March 20.

Translation by Julie Zhu

– Contact us at [email protected]

JZ/MY/RC

Department of Investment Analysis at HKEJ

EJI Weekly Newsletter

Please click here to unsubscribe