In this series, we explore Tencent Holdings (Chinese: 腾讯) (HKEX: 0700), one of China's most iconic internet companies and the most valuable Chinese company in terms of market capitalization as of the time of writing. Tencent was initially founded in 1998 with the launch of instant messaging platform QQ, but has since grown into a diversified internet company with core focuses on gaming, social media and networking (i.e. Weixin and WeChat), FinTech (i.e. WeChat Pay), cloud computing and digital content, in addition to holding a substantial investment portfolio comprising of large and small investments in public and private companies such as Riot Games, JD Group, Pinduoduo, Tesla, NIO, and Reddit.
In Part 1 of our Tencent series, we provide an overview of the constituents that comprise Tencent's ecosystem. A financial analysis of the ecosystem and discussion of its future are in Part 2 and Part 3.
Note: Weixin and WeChat are essentially two versions of the same application where Weixin is used domestically in mainland China and WeChat is used in overseas markets. Nevertheless, the two are considered to be separate legal entities and there are some differences in terms of the functionalities available across the two versions as a result of the regulatory differences between China and abroad. We use the two terms interchangeably in this article and series, although we do note that Tencent's revenues related to the application mostly come from the domestic version (i.e. Weixin).
Tencent Holdings Series
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Corporate History
Tencent was originally founded in 1998 through the launch of instant messaging software QQ. In 2004, the company expanded its business by launching QQ.com, a Yahoo-like webpage where users can browse news and other information, as well as QZone, a social networking service similar to Myspace for QQ users. The same year, Tencent also entered the gaming industry for the first time by operating foreign-developed games in China.
Tencent went public on the Hong Kong Stock Exchange in June 2004 (HKEX: 0700).
In 2005, Tencent launched an e-commerce website named Paipai (Chinese: 拍拍), which was later acquired by JD in 2016 (see our JD series here).
Along with the inception and rise of the smartphone, Tencent set up a business unit dedicated to developing mobile applications in 2009. Two years later, messaging application WeChat was launched in 2011 as Mobile QQ (i.e. the mobile version of original desktop software QQ) was losing to rival Xiaomi's MiTalk application. WeChat was designed to be more mobile-friendly and eventually emerged as the de-facto mobile messaging application in China. Also in 2011, Tencent acquired a controlling stake in Riot Games, the developer behind the world-renowned and highly popular League of Legends game.
Over the years, Tencent continued to invest further in mobile application and gaming development, in addition to expanding the portfolio of foreign-developed games the company operates in China. Tencent also expanded its scope of business to include financial technology (via WeChat Pay) and various digital content platforms (discussed in the next section), while also maintaining and growing an investment portfolio that consists of both private and publicly listed companies.
In December 2018, Tencent's online music subscription platform, Tencent Music (Chinese: 腾讯音乐娱乐), was spun-off and listed on the New York Stock Exchange (NYSE: TME).
Core Business Segments
Next, we turn to look at Tencent's core business model.
Tencent's core operations comprise of four business segments:
Value-Added Services (VAS)
Online Advertising
FinTech and Business Services
Others
#1: Value-Added Services (VAS)
The value-added services segment refers to the range of value-added services Tencent offers on its gaming and social networking platforms which can be attributed to four sub-segments: (1) domestic games, (2) international games, (3) communication and social, and (4) digital content.
Tencent's gaming-related initiatives include mobile and PC games, as well as animated series and movies based on famous games and game characters. The domestic games sub-segment includes gaming titles such as Honour of Kings, Call of Duty Mobile, Moonlight Blade Mobile, Dungeon and Fighter, and Peacekeeper Elite, while international games include League of Legends, Clash Royale, PUBG Mobile, Valorant, Brawl Stars, and Clash of Clans. Remarkably, Tencent developed and operates five out of the world's ten most popular mobile games in terms of daily active users.
The communication and social sub-segment refers to social networking and messaging applications Weixin (the Chinese domestic version of WeChat) and QQ. Revenue is generated on Weixin via video account livestreaming, where individual and official account users can livestream videos (and even concerts) via the Weixin platform. Monetization opportunities arise through short-video advertisements (recorded under the online advetising segment), livestream tipping where viewers can tip livestreamers via Weixin, as well as livestream e-commerce where sellers can promote their products via short clips or livestream videos on the Weixin platform. In contrast, revenue is generated on QQ primarily through in-application add-on purchases where users can customize their profile avatars.
Note: as a super-application, Weixin has many additional functionalities including voice and video calling, digital written content sharing (where public Weixin accounts can publish articles regularly and other users can subscribe and pay to tip them), as well as Moments, a Facebook-like feature where users can make posts with photos and captions, and browse their friends' posts. Tencent does not delve into detail regarding the monetization strategies and opportunities from these different features, but rather focuses on the video account livestreaming functionality discussed above.
The digital content sub-segment primarily refers to Tencent's video subscription service, Tencent Video (Chinese: 腾讯视频), and music subscription service, Tencent Music (Chinese: 腾讯音乐娱乐), which was spun-off and went public in 2018 (NYSE: TME). In 2021, Tencent had 236 million fee-based VAS subscriptions, of which 124 million were Tencent Video subscriptions, 76 million were Tencent Music subscriptions, and the remaining 36 million were from Tencent's other (undisclosed) digital content platforms. We think that the undisclosed subscription sources could perhaps be partly attributed to China Literature (Chinese: 阅文集团) (HKEX: 0772), an online literature subscription platform, and livestreaming platform HUYA (Chinese: 虎牙直播) (NYSE: HUYA), both of which are non-wholly owned subsidiaries of Tencent, in addition to Tencent's many other digital platforms such as Tencent Comics (Chinese: 腾讯动漫), Tencent Sports (Chinese: 腾讯体育), and
Tencent News (Chinese: 腾讯新闻). We note that Tencent does not provide a comprehensive list or diagram of its ecosystem.
#2: Online Advertising
The online advertising segment consists of two sub-segments: (1) social and other advertising, and (2) media advertising.
Social and other advertising revenue refers to the revenue generated from various features of the Weixin platform such as the short video and livestreaming functions, as well as advertisements in Weixin Moments (which Tencent refers to as the "social and others" sub-segment). The super-application nature of Weixin further facilitates the connection between merchants and end consumers by allowing users to chat with customer representatives from merchants' official Weixin accounts after clicking on advertisements in the application, and by launching relevant mini programs that can allow users to browse further information or place orders (for example, clicking on a food advertisement in the Weixin application may trigger the launch of the restaurant's mini program that allows the user to browse and order food).
To a lesser extent, Tencent also generates revenue from media advertising, which refers to online advertising revenue from non-wholly owned subsidiary BitAuto (Chinese: 易车), an automotive content and online marketing platform founded by electric vehicle brand NIO's founder, wholly owned subsidiary Sogou (Chinese: 搜狗), a search engine and Pinyin input software (see below*), as well as the company's media platforms such as Tencent News and Tencent Video.
*Hanyu Pinyin (known more shortly as just "pinyin") is the official romanization system for Mandarin in mainland China. Pinyin is frequently used as an input method to type Chinese characters on electronic devices where users can type in pinyin and the corresponding characters are suggested and outputted by the input software.
#3: FinTech and Business Services
The FinTech and business services segment refers to revenue generated from Tencent's financial technology (FinTech) business, cloud computing initiatives, and other business services. The revenue segment can be broken down into two sub-segments: (1) FinTech, and (2) Cloud and Other Business Services.
The FinTech sub-segment refers to WeChat Pay (Chinese: 微信支付), an online payment processor in the Weixin application with additional functionalities similar to those of rival Alibaba Group's Alipay (see our Ant Group series for more details). Specifically, WeChat Pay users can take out small loans via Tencent affiliate WeBank (Chinese: 微众银行), browse and invest in wealth management products, as well as obtain consumer credit ratings (China does not have an official or widely used consumer credit rating system, as discussed further in our Ant Group series).
The Cloud and Other Business Services sub-segment refers to Tencent's cloud computing business and related suite of industry enterprise solutions. The cloud computing business includes TencentQiDian (Chinese: 腾讯企点), a customer relationship management software-as-a-service (SaaS) solution that allows enterprise clients to more efficiently serve their customers, as well as Tencent Database SQL (TDSQL), a database platform-as-a-service (PaaS) solution that has been employed by more than 3,000 enterprise clients. Tencent's other business services include WeCom, a communication and collaboration tool for corporate clients, and other enterprise software solutions such as Tencent Meeting (Chinese: 腾讯会议) and Tencent Docs (Chinese: 腾讯文档).
#4: Others
The others segment refers to Tencent's investments in and production and distribution of films and television programmes for third-parties, copyrights licensing, merchandise sales (presumably related to Tencent's core entertainment business such as gaming-related merchandise which Tencent is licensed to sell), and various other activities.
Investment Portfolio
One aspect that differentiates Tencent from other Chinese tech companies is its significant investments in other companies in China and across the globe. Tencent manages its investment portfolio with a main goal of strengthening its position in core businesses and complementing its "connection" strategy in various industries. The company's investment portfolio has a particular focus on the social and digital content industries and online-to-offline and smart retail sectors, but also includes other industries such as transportation, FinTech, and cloud computing.
As of December 2021, Tencent's investment portfolio has a value of RMB878.7 billion, recorded on the asset side of the company's balance sheet under:
Investments in associates and joint ventures accounted for using the equity method
Financial assets at fair value through profit/loss
Financial assets at fair value through other comprehensive income
The fair value of Tencent's shareholdings in publicly listed investee companies (excluding subsidiaries), including those held via special purpose vehicles, was RMB982.8 billion in December 2021.
A comprehensive breakdown or list containing all of the public and private companies Tencent invests in is not provided by the company, however we include a few notable mentions by industry in the table below.
According to management, over 80% of Tencent's investments are typically in private companies, with the intention of helping these companies grow until they become public. Tencent usually makes minority investments rather than outright mergers or acquisitions.
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