China’s biggest internet company ($55bn market capitalisation and counting) showed investors again yesterday that it looks unassailable. Tencent– China’s equivalent of Facebook, MSN Messenger, Zynga and Blizzard Entertainment all rolled into one – reported first-half revenue growth of 54 per cent from a year earlier. Net income was up one-sixth. And China is supposed to be slowing down.
The key thing about Tencent is its huge user base. It claims 780m accounts on its instant messenger service QQ. Granted, that assumes one-and-a-half accounts for every internet user in China, but QQ still managed to achieve peak concurrent users of 167m in the first half. That kind of coverage allows new fee-charging games and applications to proliferate at lightening speed, which has helped sales grow an average 50 per cent annually for the past five years. One of Tencent’s latest innovations – Weixin, its smartphone messenger application – gained more than 100m users in less than a year.
One problem for Tencent is that gone are the days when revenues came hand in hand with fat margins. Its online games are a cash cow and have helped the company accumulate a net cash pile of Rmb20bn. But now it must move into less profitable online advertising to support growth. As a result, operating margins were down 9 percentage points year on year in the first half. Tencent is also turning to ecommerce, but attempts to take on Alibaba group’s online retailer Taobao will be costly.