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Commentary: How Tencent, that other Chinese Big Tech giant, is beating a path to a trillion dollars

Tencent looks set to grow to a US$1 trillion market capitalisation given its diversified revenue sources, its strong growth strategy premised on e-sports and live-streaming, says IMD Business School’s Mark Greeven.

Commentary: How Tencent, that other Chinese Big Tech giant, is beating a path to a trillion dollars

Composite pictures of Tencent, WeChat and Pinduoduo. (Photo:s Reuters and AFP)

SINGAPORE: Tencent is poised to join the trillion dollar club.

After a whopping 11 per cent rally in stock price and an equally whopping tumble of about 5 per cent last week, the question is whether we are seeing the global tech bubble expanding to Asia.

Certainly, the Hong Kong market generally was in a positive mood on the day of the 115 per cent jump.

And over this past year, Tencent’s stock price has risen by 85 per cent in value.

Nevertheless, a trillion dollars is a lot of money.

Amazon, Apple and Microsoft are all well into their first trillion-dollar market capitalisation and Apple is already over the US$2 trillion dollar mark.

Is Tencent going to join the club? There is reason to believe that Tencent still has a significant growth runway left, and has demonstrated resilience against a backdrop of continued US-China tensions.

READ: Commentary: How Tencent became world’s most valuable social media company – and then everything changed

But the question remains whether investors recognise this potential and reward its performance thus far.

DIVERSIFIED REVENUE SOURCES

Tencent’s business is more diversified than most people think. A large portion of its revenue still comes from its online gaming arm - roughly 30 per cent, but this is down from over 50 per cent just five years ago.

Today, around a quarter of Tencent’s revenue comes from FinTech and business services. Roughly one-fifth comes from social network-driven entertainment like Tencent Video and WeChat Reader, and the last one-fifth comes from advertisement.

Tencent is certainly more diversified than other tech giants, such as Facebook. This allows it to avoid relying on one business amid an economic slowdown or in the face of a (geopolitical) crisis.

The messenger app WeChat is seen among U.S. flags in this illustration picture taken Aug. 7, 2020. (Photo: REUTERS/Florence Lo/Illustration)

Clearly, Tencent is good at looking around. The company is hyperaware of what is happening outside of its own organization.

It has tentacles in dozens of sectors. The Tencent empire is ever expanding through its WeChat-enabled ecosystem.

Tencent is also certainly not a first mover, but understands the benefits of being a follower. 

In 2020, Tencent saw its major competitor, Alibaba, thriving, turbocharged by a COVID-19 crisis-accelerated e-commerce boom and livestreaming taking off big time.

READ: Commentary: Alibaba makes a whopping US$28 billion bet on its next breakthrough act

LIVESTREAMING AND E-COMMERCE TWO NEW GROWTH DRIVERS

As a multibillion dollar opportunity where mostly Alibaba, through Taobao Live, is reaping the benefits, livestreaming is a growth opportunity for Tencent - especially as its closed-circle WeChat provides an alternative to the prevalent Taobao Live and Tiktok models.

In August 2020, Tencent announced plans to integrate its video and e-commerce platforms, Tencent Video and group-buying platform Xiao E Pin Pin. This integration will boost transactions and should lead to an increase in WeChat Pay revenue, from commission from merchants.

The October 2020 announcement to merge two Twitch-like livestreaming platforms in China, DouYu and Huya, was the next step.

People take pictures of the Huya Inc. logo ahead of the company's IPO at the New York Stock Exchange (NYSE) in New York, U.S., May 11, 2018. (Photo: REUTERS/Brendan McDermid)

Huya, DouYu and Tencent's live-streaming branch Penguin esports together accounted for nearly 86 per cent of the game live-streaming market of China. Tencent is rumoured to be planning to enter the livestreaming market in the US, following its quiet beta-testing of trovo.live.

There is little doubt about the growth potential in e-commerce. This has been a long-term weakness for Tencent which has struggled to enter the e-commerce field and tried for many years with little success.

On the one hand, the two major platforms - Taobao and JD.com - have a large majority market share. On the other hand, new disruptors, such as Pinduoduo, Meituan and even recently Bytedance, have popped up everywhere, intensifying competition.

READ: Commentary: The new wave of Chinese tech champions you never heard of but should know

So, Tencent is taking a different approach. One might call it the “Walmart approach”.

When Walmart was struggling with ecommerce in Asia, it acquired an online grocery platform, Yihaodian, that was later acquired by JD.com. Walmart did the same in India, when it invested in the leading platform Flipkart.

Similarly, Tencent has invested in JD.com and owns about 17 per cent of the successful social commerce giant Pinduoduo.

But that is not enough; Tencent announced its own shopping feature within the WeChat ecosystem, called Minishop, which allows users to sell products offered on other e-commerce sites like JD.com.

A sign of China's e-commerce company JD.com is seen at its shop at a mall in Shanghai, China on Oct 26, 2018. (Photo: REUTERS/Aly Song)

This is particularly attractive for pulling away smaller merchants from the Taobao platform, who increasingly feel squeezed by Alibaba.

And there is huge revenue to be made in this approach: Last year saw a strong increase in sales on WeChat’s mini programmes.

Being a quiet follower, rather the opposite of Alibaba, might turn out to be a clever strategy.

Similarly, Tencent’s Xiao E Pinpin, basically modeled after Pinduoduo with elements borrowed from another rival, luxury shopping platform Xiaohongshu, adopts a clever follower strategy”.

READ: Commentary: Retail in China has exploded with online sales agents. Now Walmart wants in

AVOIDING ATTENTION

Tencent was one of the tech companies in China summoned by Beijing to be warned for monopolistic behaviour.

In light of the recent anti-trust moves of the Chinese government, Ant Group has gotten the most heat.

WeChat has its own set of troubles with a US ban, called for by former President Donald Trump, in September 2020.

But that move was met with scepticism, even within the US. In all, Tencent has managed to avoiding the real heat coming from the anti-trust challenges and US-China trade war, of which the main impact has been on Huawei. There are at least three reasons for this.

Huawei logo is pictured on the headquarters building on Jul 14, 2020. (Photo: REUTERS/Matthew Childs)

First, the nature of Tencent’s businesses is in entertainment and social communication in closed, friend-based, communities.

This is different from national telecom network operators (like Huawei) or massive financial services providers (like Ant). Nor does the company rely on extensive machine learning driven algorithms that capture consumer behaviour across all users (like Tiktok does).

Second, although WeChat Pay is an important arm in WeChat’s ecosystem, it is far less important as a revenue source.

As Zhijun Gen, VP of Weixin group said in 2019: Mobile payment is already a traditional industry. WeChat Pay is no longer focused on payments. It uses digital tools to help industry partners work together to improve the consumer experience.

READ: Commentary: Singapore's Sea is world's best performing stock. And it can do better

Third, WeChat’s approach to internationalisation is quite different from Ant. While Ant is aiming to expand its payment and transaction empire across the globe, WeChat sees more value in playing the role of a bridge between consumer and merchant.

As a communication and service platform, WeChat stays away from the financial services sectors and regulators. It doesn’t offer micro-loans and delayed payments LIKE Ant does.

Having said that, Tencent is a latecomer compared to Alibaba when it comes to the internationalisation of its products but that hasn’t worked out too badly for the Chinese tech firm.

READ: Commentary: Has Razer found a new way to reach profitability?

READ: Commentary: Why did China wait so long to crack down on Alibaba?

Perhaps this success can be attributed to one thing: Pony Ma, the founder of Tencent, has been following the trade war closely.

As early as 2019 he was quoted as one of the first Chinese Big Tech leaders to espouse concerns the trade war would turn into a tech war.

Well, it has turned into a tech war, and Tencent cannot avoid the fire, but it is showing resilience that might keep Ma hopeful.

Listen to a lawyer and a media professor break down WhatsApp's new terms of service on CNA's Heart of the Matter podcast:

 

Mark Greeven is Professor of Innovation and Strategy at IMD Business School in Switzerland and Singapore.

Source: CNA/sl

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