Tencent- A Monster being hunted?

The title of ‘China’s most Valuable Company’ was robbed from Tencent earlier this year, due its free-falling share price, which since January has fallen 40%. With a market capitalisation of $353 Billion, shedding $200 Billion from last year – the conglomerate has also lost its space in the being the world’s 10 biggest companies, with Refinitiv now ranks it No. 11 in a list of the world’s biggest companies. The term ‘death by a thousand cuts’ would be appropriate to describe the company’s fortune, with increased scrutiny from Chinese regulators and increased prominence of competitors like Alibaba on the horizon, and just yesterday the CSI 300 index bearish sentiment, falling 10% this month. Things are not looking good for the Technological Behemoth.

‘Made in China 2025’ refers to the Beijing’s ambition of transforming the country into a high-tech powerhouse a top priority. Under the initiative, China seeks to dominate in industries such as robotics, information technology, aviation and new energy vehicles. This is where the main Chinese players come into play, colloquially known as ‘BAT’- Baidu, Alibaba and Tencent. Beijing wants to use companies, such as Tencent and Alibaba Group Holding, to achieve technological independence from the West. With Key battlegrounds being within the Internet of Things and 5G. This is exactly where Tencent wants to plant itself, announced in conjunction with its recent restructuring. Tencent aims “to become a digital assistant of all industries,” said Liu Zhiping, the company’s President[1].

Whilst it could be said that Tencent biggest challenge is the ensuing ‘FAANG V BAT’ battle to answer the existential question of who dominates the Global Technological world order? Rather it is on the domestic front that things are really heating up. Earlier this year Chinese Regulators – China’s State Administration of Radio and Television and Ministry of Education have banned the company sales of popular game ‘Monster Hunter: World’, the rationale being to combat the increased rates of fever and myopia among minors, with gaming and tv being argued the main catalyst. This dealt a heavy blow to Tencent, as gaming is their biggest revenue stream and the company blamed their loss on market cap due to regulatory concerns. A breakdown of Q2 results showed that while smartphone games revenues were up 19%, a more sceptic view would focus on the fact this was a decrease from Q1 results and in terms of PC games, Q2 figures were down 5% in comparison to Q1.

Furthermore, in regards to competitors whilst it true that the likes of Bytedance’s (crowned the world’s most valuable start up at a valuation of $75bn) have caused troubles and Alibaba’s dominance of cloud computing, limits Tencent success – the most significant competition noted by critics has been internal, where the increase of silo’s has, in blunt terms, meant the Company is cannibalizing itself.

But in the month of October, the Company announced it was restructuring. The most significant points to take away are, the restructuring will hopefully foster a culture of collaboration and it will more importantly, allow Tencent to catch up with Alibaba in the fast growing cloud computing market, reducing its dependency on its video game division.

One revenue stream which sets Tencent apart from its rivals within the region, is the music streaming division of the Internet Giant – Tencent Music Entertainment (TME), or dubbed ‘China’s answer to Spotify’ and its impending IPO, which last time was meant to be completed this month, but has postponed to happen within the year. The IPO (initial public offering) would bring a valuation of $30 Billion, making it one of the potential largest tech IPO’S. The move has been praised, as TME would be consolidating a very fragmented market. Predictions estimate that the China’s online music pan-entertainment market will grow from Rmb33bn last year to Rmb215.2bn in 2023. This provides an excellent opportunity for TME who are the major player in terms of music streaming. Coupled with their popular and growing ‘WeSing’ which boasts 40bn users- Tencent presence in China’s entertainment sector is unrivalled.

In comparison to more international rivals, such as Spotify who also listed earlier this year but opted for a ‘direct listing’ instead of IPO. TME has 800m monthly users, four more times than Spotify. But it still faces the challenges that the likes of Spotify and Apple Music face, royalties and license fees will eat into profits and possibly require TME to adopt a free cash flow system, must be noted that the likes of Spotify are yet to make a profit. However, as only 3.6% of TME users are paying for its services, the opportunity to monetise the platform is exponentially increased.

TME reported strong financial with revenue more than doubling in 2017 to $1.66 billion. It posted a profit of $199 million in 2017, up from roughly $2 million a year earlier, according to the Wall Street Journal[2]. These are very impressive for a Company with only a two year history, created after Tencent bought a controlling stake in China Music Corp.

The future looks bright for ‘Pony’ Ma, with the recent restructured triggering ambition in cloud computing and TME’s IPO on the horizon – whilst Q3 results will most likely show a drop, 2019 will be a exciting period.

Forecast of Growth by Market Beat 2018