. . . Owned by Tencent – the most profitable internet company in China
You’ve probably never heard of it, unless you live in China. QQ has almost 950 million accounts, compared to Facebook’s 900 million subscribers globally – 18 times the number of Microsoft’s MSN subscribers in China. QQ is owned by Tencent, the world’s 3rd largest internet company after Google and Amazon.
I recommended Tencent (0700.HK) as spec play back in December when its stock price was 30% lower and also when Boston Consulting Group ranked it #1 in the world in terms of total shareholder return from 2005-2009. Tencent shares multiplied by a factor of over twenty over the past 5 years to a market cap of $42.4 billion and profit has doubled in 2009 to $754.7. Compare that with Facebook which has surged fivefold in value over the past 2 years. Also note that Tencent holds about a 1% stake in Facebook.
Tencent is valued at about 15 times revenue, according to Bloomberg data. Compare that to Baidu, China’s largest search engine, which trades at about 31 times revenue. Youku.com, Chinese largest online video site, is valued at about 90 times revenue after it’s IPO last month.
Tencent was founded in 1998 in Shenzhen, just over the border from Hong Kong, by Ma Huateng, one of China’s richest men. It began as the QQ instant messaging service and has grown into the most profitable internet company in China. That’s pretty remarkable, given China’s competitive online market which includes search giant, Baidu, to China’s e-commerce leaders, Alibaba, and more recently online video players like Tudou and e-tailer, Dangdang.
QQ’s soaring popularity has helped turned China into the world’s largest market for both internet users and mobile phone subscribers. It evolved from an instant-messaging site into a cultural phenomenon with added services like multiplayer online gaming, ring tone downloads, and social networks like Qzone. It even has a virtual bank. ‘Q-Bi’ coins can be used to buy items and merchandise on the site. The currency has become so popular that other online gaming sites and e-commerce stores have started to accept the virtual coins as currency. QQ has become a marketing powerhouse and is the homegrown favorite for multinational advertisers.
Tencent is well positioned to increase its domination in China but, with growth slowing down in the mainland, the company is starting to look overseas for expansion opportunities. In December 2010, Tencent took on Microsoft and Yahoo by offering versions of its QQ instant-messaging service in English, Japanese and French, aiming at expatriates living in China and overseas users with acquaintances in China. Tencent is pushing a search engine to compete with Baidu and has formed a partnership with Youku rival Tudou to offer video-search services.
Tencent also plans to set up a social-networking site in English in early 2011 to rival Facebook, which has been blocked in China for the past 18 months. Tencent has already made investments in India, Russia and Thailand, mainly through joint ventures with South Africa’s Naspers, Tencent’s largest shareholder.
MY TAKE: Tencent runs the risk of overreaching and can be volatile. However, its momentum and earnings per share suggests there’s still a lot of room to grow. For an investor (as opposed to a trader), I’d be a buyer on any pull back.