Tencent Q3 17 – Time purchase

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Mighty core business buys time.

• Tencent reported strong results driven mostly by its content offerings which gives the company time to work out how to fully monetise the vast the community it has created.
• Q3 17 revenues / net income RMB65.2bn ($9.8bn) / RMB18.0bn ($2.7bn) nicely ahead of estimates of RMB61.0bn / RMB15.8bn.
• Tencent called out smartphone games (especially Honour of Kings) and its online video platform (which it now believes has overtaken Alibaba and Baidu to become China’s No. 1 place for video streaming) as top performers during the quarter.
• Most revenue streams grew between 45% and 50% YoY but it was the contribution from other businesses such as first-time monetisation of WeChat Pay and cloud services that really drove the numbers above expectations.
• Overall, these revenues grew by 143% to RMB12.0bn which pushed the corporate average revenue growth rate to a 7 year high of 61% YoY.
• While the core businesses continue to defy the slowdown I have been expecting, the laggard in the company remains the monetisation of the ecosystem that it has created.
• This is what Baidu and Google are really good at and what Alibaba has been showing increasing signs of getting to grips with.
• The vast majority of Tencent’s revenues come from selling content like games, in app purchases or streaming subscriptions making it more like Netflix and Amazon rather than Google or Facebook.
• Tencent has created a community of 980m users at least half of whom regularly interact with Tencent in multiple Digital Life segments.
• This creates a substantial revenue opportunity for Tencent but one I think that it has struggled to really get to grips with.
• Online advertising is still just 18% of revenues which I calculate is between one third to one half of what it should be for an ecosystem with 980m active users.
• It is here that I still see the real upside for Tencent as it has done little in the last 15 months to address this opportunity.
• To be fair to the company, management time has been very successfully invested in growing the existing businesses but the time will come when it will need to monetise this opportunity to keep growth going.
• Here, I think that Tencent has a lot of work to do as its score on RFM’s 8 Laws of Robotics is pretty low, particularly against Laws 5 and 6 which focus on the integration of services and user data.
• To monetise the ecosystem effectively, I think a good score against these measures is required and Tencent has so far shown little sign of grasping the importance of integration.
• However, while the core business continues to defy expectations, this is not a problem from a share price perspective and buys management time to get to grips with integrating its assets into a single place where users can live their Digital Lives.
• This is how I can continue to like Tencent as an investment despite its apparent slowness to move onto the next stage of its development.
• While the core business continues to deliver, the valuation remains underpinned with the potential further upside coming from monetisation of the ecosystem.
• This is why Tencent remains my preferred pick globally.