Morningstar | Wide-Moat Tencent Remains Undervalued Despite Temporary Headwind
Wide-moat Internet giant Tencent has the largest social-networking platforms in China. Its two social-networking platforms Weixin/WeChat and QQ have monthly active user, or MAU, bases exceeding 1 billion and 803 million users, respectively (versus a Chinese population of 1.4 billion). Tencent monetises its social-networking platforms through selling in-game items, virtual items, premium service subscriptions, online advertising, payments, financial products, and others. The firm's strong distribution capability in the online gaming business via its social platforms is underpinned by a network effect that gives Tencent a sustainable competitive advantage. As a result, Tencent has 58% revenue share in the Chinese online gaming market, versus its nearest rival Netease’s 18% in 2017, according to iResearch. Tencent is also ranked number-one in gaming revenue globally, 72% higher than its next-largest rival Sony. Tencent’s ad load for Weixin Moments is lower than industry peers, and we see tremendous growth potential in advertising revenue. This can be achieved through increasing ad load, and reducing the traffic threshold for advertisements in Weixin Official Accounts. Meanwhile, Tencent’s monetization potential in financial technology, or fintech, is substantial. It had the second-largest mobile payment market share of 38% in the fourth-quarter 2017, versus Alipay’s 54%. We believe it will gradually convert users to its financial services products, such as wealth management products. Its wealth management platform Licaitong’s assets under management reached CNY 300 billion as of January 2018, compared with “over CNY 100 billion†as reported by Xinhuanet in 2015.Mini programs in Weixin allow Weixin to take market share from the current mobile operating systems of iOS and Android. Users can connect to a variety of services and content through mini programs without downloading apps. Mini programs can be monetized through advertising, e-commerce, and so on. The number of mini programs reached 58,000 and daily active users reached 200 million as of June 2018, according to Kukeduo.Tencent Holdings Limited is an investment holding company principally involved in the provision of value-added services (VAS) and online advertising services. The Company operates through three main segments. The VAS segment is mainly involved in provision of online/mobile games, community value-added services and applications across various Internet and mobile platforms. The Online Advertising segment is mainly engaged in display based and performance based advertisements. The Others segment is mainly involved in provision of payment related services, cloud services and other services.
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