Tencent Holdings posted a 59 per cent rise in second quarter profits for 2014 during August and saw its monthly active users on WeChat, up from 396 million the previous quarter to 438 million (versus WhatsApp’s 500 million), with revenue also up by 37 per cent.
These are impressive numbers, but for a Chinese tech giant like Tencent, is it enough? There are a lot of factors at play right now, but one thing’s for sure: the company is doing its best to take on the world.
E-commerce as battleground
While it was a very good earnings report at face value, and certainly leaves Tencent shareholders with nothing to grumble about, the company still faces its fair share of challenges — just one of which is its e-commerce rivalry with Alibaba, following Tencent’s purchase of JD earlier this year.
There’s no doubt that with its Q2 earnings, Tencent beat almost all analyst estimates. And yet, it failed to generate much buzz in the market.
The modest reaction just goes to highlight the enormous weight of expectation on China’s mobile games and social giant. The country’s mobile games market is at nearly US$3 billion by some measures, and on the cusp of outperforming the US. And yes, Tencent has shown very strong growth in these key areas, as you would expect.
Here in Hong Kong’s English-language newspaper, Tencent’s earnings garnered relatively little attention — no front page business splash the day following. Instead, a Cathay Pacific story took that spot.
Would disappointing earnings have been a bigger headline? Perhaps. It seems like growth of nearly 60 per cent is something of a non-story now for Tencent, as absurd as that may be. Investors want to know for just how long can it keep up growth of over 40 per cent. Five years? 10 years? Right now it’s anyone’s guess.
But it’s also worth pointing out that this is not a question that is asked of many companies. Eventually, Tencent’s growth will have to slow. But when?
Is Tencent a harder sell than Alibaba?
Some believe, and perhaps not without merit, that Tencent is a harder sell than other China-grown companies like Alibaba that lends itself more easily to media comparisons with the likes of Amazon and PayPal in the Western world.
Others see Tencent as too diversified, and don’t quite know how to place it. An important factor going forward will be how well it monetise its existing social messaging user base on WeChat and QQ. We will likely have a better sense of that as JD releases more of its own earnings in the coming quarters.
We know that by Tencent joining forces with China’s second largest e-commerce player, mobile traffic to the online retailer is likely to increase thanks to integration with WeChat and QQ.
Tencent wants to allow users on its platform to buy and pay for products on JD as easily as possible. This is a powerful partnership that Alibaba still crucially lacks — its own social messaging platform Laiwang, which it rolled out in September 2013, is still not a real threat to Tencent.
This ability of Tencent to efficiently funnel hundreds of millions of active daily users on mobile to JD’s checkouts cannot be underestimated, especially in the growing spending profile of a country like China. It could be a hugely disruptive force.
In admitting it couldn’t single-handedly take on Alibaba, Tencent, whose share price has almost doubled in the space of a year, has instead played to its strengths in partnering with JD, now also preparing for an IPO similar to Alibaba’s.
How effective this double-team attack against Alibaba will be, having already integrated logistics and other areas, remains to be seen. I expect it will be very effective indeed.
New private banking licenses
There’s no doubt that Alibaba and Tencent, like Amazon and eBay, are changing the world; they’re finding ways to export deflation, while at the same time consuming many different types of businesses, from retailers to banks.
There are interesting developments taking shape in China right now, especially with private banking licenses. We know now that Tencent is in the process of opening its own bank.
Finance is an area offering a lot of growth potential as traditional finance companies have been far too slow to transition over to online in any really innovative ways, leaving barriers to disruption lower than they otherwise may have been. This has created a clear opportunity for Tencent.
But at the same time, banking remains a competitive and highly regulated industry, and despite Tencent’s strengths online, it’s not going to be a free lunch by any means. The cost of competing remains very high, and there’s also the question of consumers trusting established financial institutions with proven records.
Nevertheless, Tencent, with its nearly 400 million-strong active customer base on WeChat alone and its deep penetration of the markets, thinks offering some sort of online banking service through mobile may be a way to monetise that existing but untapped revenue channel.
But just how big does Tencent let this area become for its business? And how big do the Chinese regulatory authorities let it get? While traditional banks are not technology firms, the threat from Tencent will likely force them to improve their own online offerings to better compete.
Tencent is certainly painting a picture of a company doing everything right. Is this the ‘rise and rise’ of Tencent? Or is what goes up bound to fall back down?