Tencent Deep Dive

A tech conglomerate with a leading industry position in no fewer than 8 industries with revenues growing ~20% and trading at 24x earnings excl. investments, Tencent is the company you would have tried to create if you had a crystal ball in China in 1998. 

But Tencent didn’t need a crystal ball because  they had Pony Ma, who led Tencent to grow revenues at an outstanding ~60% CAGR over 20 years, and became profitable years before their 2004 IPO. In fact, valued at just 14x 2003 actual earnings while growing >50%, Tencent may have been one of the cheapest public offerings of all time, rewarding early investors with a ~590x return or ~42% compounded annual return. 

However, incredibly, all of their businesses that operated in 2003 are now a trivial part of Tencent today. Gaming, SVOD, music streaming, social media, payment, cloud, literature, advertising, and enterprise Saas make them one of the most diversified tech companies globally. 

But that understates their dominance– WeChat (or Weixin) is the connective tissue of not just Tencent’s ecosystem, but the entire country’s.  

Hosting millions of mini-programs accessible only through WeChat, they don’t just have their own app store, they have exclusive access. Add in 20 million official accounts, which have critical information on millions of businesses, services and KOLs, and it starts to become apparent why many Chinese users seldom bother with Baidu’s general search—whatever they want is not only on WeChat, but restricted to it. 

Logged-in users with WeChat Pay integration and a user base of >1.2bn who spent ~$250bn on the platform last year means that it is almost always easier for a business to build a mini-program and official account within WeChat’s ecosystem than try to develop a presence outside of it. Just look to Alibaba, a company with 950mn active customers in just China, and yet they still see value in creating a mini-program to have a presence on WeChat. In fact, Pinduoduo’s rise could very well have been obviated by an early Alibaba presence on WeChat. 

Tencent’s WeChat is just so large that its gravitational attraction pulls everything towards it and no company is too big to be better off without it. If you wanted to inconvenience the most amount of people to the highest degree by deleting just one app, you’d pick WeChat. 

Such importance naturally opens the door up to multiple monetization opportunities. However, despite WeChat’s importance, Tencent’s monolith gaming business and other segments means WeChat isn’t responsible for even half of their revenues. 

In gaming, Tencent not only is the largest game distributor in China (the world’s largest gaming market), but also the most important developer with strategic investments in over 100 gaming companies. Their Honor of King’s, created in-house, generated over $3bn in 2021 alone. 

Tencent Video, their streaming services, is an industry leader with ~600mn MAUs and in Music streaming they have not only the most popular music app, but the top 3.

All of these dominant businesses (and the many others we didn’t mention) are how Tencent has maintained some of the highest ROIC of any company globally, reaching triple digits for much of its history. 

But what will the future look like? How has regulation impacted them? What competition do they have to worry about? And can you in very in-depth detail explain all of their businesses including the less well known ones like China Literature, QQ, and their ad network? 

All of this and much more in our longest write-up yet, at ~34,000 words. We start with Tencent’s founding history and take you through Tencent’s full 2+ decade history to deliver you a deep understanding of one of the world’s largest and most complex technology companies. (Table of Contents below).

You can find the following (and more) in this report:

1. Introduction
   • Founding History.
   • Background History.
2. The Business.
   • Gaming.
     • Mobile Gaming.
   • App Stores and App Downloads.
   • Social Media.
     • QQ.
     • QQ Mobile.
     • QZone.
     • Weixin/WeChat.
       • Weixin Ecosystem and a Superapp.
   • Professional Media.
     • Tencent Video.
     • Tencent Music.
     • China Literature.
3. Monetization
   • VAS.
   • Online Advertising.
   • Fintech and Business Services.
     • Fintech
     • Business Services
       • TAM and Market Dynamics.
       • Cloud Market Developments.
       • Government Relations.
   • Others.
4. Investments
   • Focus Areas.
   • Value Add.
   • Billion Dollar Stakes.
   • 2021 Private Investments.
5. Thesis and Valuation.
   • ROIC.
6. Regulation.
7. Risks.
8. Model Summary.
9. Conclusion.

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