You know you have a killer product when you have irked some of the biggest companies in the world. Welcome to Tencent, China’s version of Facebook, MSN Messenger, Zynga and Blizzard Entertainment all rolled into one. Its Weixin (we chat) application, which allows users to chat and message each other via a smartphone for free, had amassed almost 200m users by the end of March – a threefold increase from a year ago. Little wonder China’s giant mobile phone operators complain of lost revenues. Tencent’s shareholders are not upset, however. Shares have gained 350 per cent in the past five years against a one-tenth fall in the benchmark Hang Seng index.
It is the popularity of Tencent’s mobile and internet services that helped the earnings it reported this week to jump 40 per cent from a year earlier in the first quarter. Its instant messenger site QQ now claims 825m subscribers. Admittedly this includes multiple accounts among China’s 560m internet users but peak concurrent users still edged up 3 per cent from a year ago to 175m over the period. Such critical mass allows Tencent to spread its online game products easily, which has driven revenues up by an average 60 per cent over the past five years. Its products’ popularity is increasingly attractive to advertisers. Tencent’s video advertising revenues doubled from a year ago.
Still, Tencent is yet to give clear guidance on when it expects to monetise its mobile application Weixin. But the $5bn the company has amassed in net cash through the success of its internet platforms gives it ample room to test the water. So far the telecoms regulator has resisted pressure from operators, which include the mighty China Mobile, to crack down, but it remains a risk. Operators could also respond by changing the way they charge for the data required by such mobile applications. So far any regulatory risk has done little to deter investors. Shares jumped 7 per cent last Thursday after the results, leaving Tencent trading on 26 times forward earnings – a notch closer to its long-term average of 28 times. That sounds heady but up against Facebook’s multiple of 47 times on lacklustre earnings growth, Tencent’s valuation looks far less ludicrous.