Tencent Q2 16A – Stairway to heaven?

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Tencent remains a few steps away from greatness. 

• Tencent followed Alibaba in reporting a mighty set of numbers driven not by user numbers, but by its ability to generate more revenues from the users it already has.
• Q2 16A revenues / EPS were RMB35.7bn / RMB1.13 compared to forecasts of RMB33.3bn / RMB1.00 and RFM at RMB31.1bn / RMB1.02.
• Weixin / WeChat reported 806m MaUs while its PC based chat system QQ recorded 899m MaUs with 667m of those engaging with Tencent’s content and gaming offerings.
• This combined with an improving level of monetisation of the traffic that it generates and returns on investments made in premium, international content underpinned the very strong quarter.
• Very much like Alibaba, Tencent is beginning to make the right noises that indicate that it is starting to think like an ecosystem but the proof will remain in the pudding.
• This is because while Tencent offers single sign-on across many of its properties, the services that sit underneath this sign on remain independent and discrete.
• For example, it makes no sense at all for QQ and Weixin / WeChat to be independent systems and I think that much more value could be derived if Tencent was to put the two together.
• However, there is no sign of this and I think that this will ultimately limit the degree to which Tencent will be able to monetise its users.
• Despite this, the organic growth of Weixin / WeChat into areas outside of instant messaging is impressive.
• Weixin can be used for instant messaging, shopping, social networking, gaming, banking and payments as well as many O2O services such as ride hailing and food ordering.
• Consequently, it is possible that Tencent may end up with a fully integrated ecosystem through the organic growth of Weixin / WeChat.
• This would solve the integration and data sharing issues that I think are holding it back from realising its full potential.
• Unfortinately, most of Tencent’s usage (in terms of time spent) and almost all of its monetisation lie outside of Weixin / WeChat leaving me thinking that this alone will not be enough.
• I need to see Tencent fully embrace the ecosystem concept across all of its properties before I can start to believe that Tencent will maximise its potential.
• This potential is significant as RFM estimates that 2018E revenues and profits could be 40-50% higher if Tencent is able to fully monetise the traffic that is being generated by its services.
• This could allow a further substantial appreciation in the share price which is why I am watching Tencent very closely for any sign of moves in this direction.
• In the meantime, Samsung, Microsoft and Baidu remain my top choices for 2016.