What we can learn from Hillhouse's Tencent bet

July 11, 2019 11:55
Early investors in Chinese internet giant Tencent have reaped returns that nobody had imagined back then. Photo: Reuters

Like most graduate students, Zhang Lei, now CEO of Hillhouse Capital, was trying hard to find an intern job in 1998.

But he didn’t have much luck and failed to get into the last round after a number of interviews in Wall Street firms.

He used to work in a mining company and had little financial experience, that’s probably why he got turned down.

Fortunately, Zhang met Yale University chief investment officer David Swensen, who gave him his first job in the investment world.

In 2001, China joined WTO. Even though Zhang was in the US, he could feel the tremendous potential of China, so he decided to move to Hong Kong to start his own company.

He met with several ventral capital investors to raise capital for Hillhouse, but all the conversations ended nowhere.

In the end, Zhang secured US$20 million from Swenson, helping his venture take off.

Zhang studied many companies and eventually selected Tencent as the investment target.

"The biggest challenge back then was that nobody I know used QQ. Everyone was using MSN in 2005. QQ users were considered to be mostly young, low-income and with poor education,” Zhang said, referring to Tencent's instant messaging service.

He decided to do due diligence and went to Yiwu’s small commodity market. To his surprise, he found that every vendor there listed out QQ accounts on their name cards. The spread of QQ users was far wider than what he had thought.

Zhang certainly made a bold bet, but only after he developed strong confidence on Tencent based on research.

Investors should look at a company and see what sort of value it has created for consumers and customers. The world would reward these value-creating entrepreneurs sooner or later, Zhang noted.

Tencent was worth just a few billion dollars when Zhang invested in it, but now the Chinese social media and gaming giant is valued at more than US$400 billion.

Swensen’s US$20 million investment proved a very wise move, turning out to be the most profitable investment ever by Yale University.

Things like technical analysis may help you make some small profit, but if you are going after big reward, value investing, which is about finding companies that create value for users and society and are available at reasonable price, is the only way.

In my opinion, there are still lots of opportunities to find such investment targets in the technology sector. As they say, we ain’t seen nothing yet.

This article appeared in the Hong Kong Economic Journal on July 10

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Columnist at the Hong Kong Economic Journal