Tencent Overtakes Facebook

Chinese social networking firm has now become the fifth-largest company in the world after its shares hit a record high in Hong Kong

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Hong Kong-listed social networking firm Tencent (00700) has overtaken Facebook (FB) in terms of market value, after its shares hit a record high on Tuesday.

The company’s valuation reached reached 4.15 trillion Hong Kong dollars ($531 billion), beating the US social network's $519 billion and in the process becoming the fifth-largest company in the world, just behind Amazon (AMZN).

Last week Morningstar equity analysts raised their fair value estimate to HKD 492 per share from HKD 344 per share - the current share price is HKD 439. Sixty-six percent of the upgrade is due to revised growth and margins, with the rest due to incorporating Tencent’s share of the market valuation of its major investments. We think Tencent has numerous growth opportunities behind our 10-year revenue compound annual growth rate (CAGR) of 34%, versus 21% previously, and our adjusted operating profit CAGR of 25%, versus 19% previously.

Following the third-quarter result, we reduced our net profit forecast for 2017 to 67 billion Chinese yuan ($10 billion) from 72 billion Chinese yuan, and we maintain our revenue forecast for 2017 at approximately CNY 242 billion.

We now expect revenue to be driven by higher monetisation of mobile games, expansion of game genres, e-sports and increased willingness to subscribe for content in China –the number of subscriptions grew 19% year over year in the quarter. Online advertising revenue is expected to see a 10-year CAGR of 26%, driven by continuous shift of marketing budgets to social media and video – in both of which Tencent has a stronghold – improving targeting technologies, and the gradual yet inevitable increase in ad inventories in the long term.

We also expect rapid expansion in both payment and cloud business – which grew in the triple digits in the quarter – and online lending and wealth-management businesses. Expansion in the merchant network globally to serve outgoing Chinese customers will drive payment revenue, while the gradual migration to the cloud in China and the provision of artificial-intelligence-enabled cloud services will drive cloud revenue. 

How Has Tencent Got So Big?

Tencent is China's largest Internet service provider based on its two key social-networking platforms, Weixin/Wechat and QQ. Through connecting users with content, services, and hardware, Tencent has won the loyalty of several hundred million subscribers. Weixin/Wechat, the super mobile app launched in January 2011, has accumulated 963 million monthly active users in China. QQ, the earliest instant-messaging software in China, launched in 1999, replicated its success in mobile internet, with 850 million monthly active users. We believe the vast and sticky user base has formed a strong network effect – where the value of a service increases the more people use it – which provides the basis for Tencent's wide economic moat or strong competitive advantage.

Tencent has been monetising its popular social-networking platforms through selling in-game items, virtual items, premium service subscriptions, and online advertising; we believe the monetisation will extend to payments, financial products, and cloud services in the long term. Tencent has gained more than 50% revenue share among all Chinese online game companies in the past several years. The firm's key competitive advantage in the online gaming sector is its strong distribution capability, based on network effect. In 2016, Tencent distributed almost half of China's top 10 mobile games and 25% of the top 100 mobile games. Meanwhile, Tencent’s mobile payment system has rapidly been catching up with Alipay, and its market share increased to 37% in the fourth quarter of 2016 from less than 20% in 2015, leveraging its massive user base and extensive cooperation with third-party



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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Amazon.com Inc183.75 USD-2.22Rating
Ford Motor Co14.55 USD0.48Rating
Tencent Holdings Ltd369.20 HKD-0.70Rating

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