Tuesday, August 14, 2012

China's Tencent Outperforms Its Western Peers - WSJ.com

China's Tencent Outperforms Its Western Peers - WSJ.com


As Western social-media and Internet companies from Facebook Inc. FB -5.65% toGroupon Inc. GRPN -27.02% struggle to meet investor expectations on earnings and share price, their biggest peer in China still going strong.
The share price of Tencent Holdings Ltd., 0700.HK +0.88% China's leading Internet company—with businesses from online gaming to instant messaging—has soared 48% this year in Hong Kong. Analysts expect that its results for the quarter ended June 30, to be released Wednesday, will continue to show healthy revenue and profit growth, despite slowing online advertising outlays as the Chinese economy softens.
Bloomberg News
Tencent's QQ smartphone app, upper left, is displayed on a laptop computer.
Shenzhen-based Tencent has no obvious U.S. counterpart, its portfolio a hodgepodge of services somewhat similar to those of several U.S. companies, including Yahoo Inc., YHOO -1.93%Google Inc., GOOG +1.31% Facebook, Twitter Inc. and social-game developerZynga Inc. ZNGA +3.07% It is a veritable Internet conglomerate, the likes of which doesn't exist in the U.S. or Europe.
Founded in 1998, Tencent first gained an online presence with an instant-messaging platform. Since then, it has used its strength in chat—in the first quarter about 750 million people used its service at least once a month—to drive traffic to new products like videogames and social-media sites.
China is the world's biggest market for online businesses, home to about a quarter of the world's Internet users, according to the International Telecommunication Union, a United Nations agency. The country's online market is dominated by Chinese companies, in part because government barriers restrict the likes of Google and Facebook.
Tencent's blend of services and the success of its online gaming has given it breathing room during times of sluggish advertising demand, and made it freer to take risks and launch new services.
Tencent's games—from massive online role-playing games to first-person shooters and casual games— are among the most-played in all categories. In the first quarter, online gaming provided more than half of Tencent's overall revenue, compared with 6% for the company's advertising business.
"Not only does Tencent have a cash cow in its strong gaming business, but the company is also best-positioned in high-potential markets like social media and mobile Internet services," said Jefferies analyst Cynthia Meng, who has a Buy rating on Tencent's stock.
Steady gaming revenue has allowed Tencent to invest in areas where it sees long-term potential without worrying too much about short-term profits. In May it set up a unit to run its nascent e-commerce operations, preparing to take on established players like Alibaba Group Holding Ltd. and 360buy.com.
On average, the 12 analysts polled by FactSet expected Tencent to report a net profit of $477 million for the quarter ended June 30, an increase of more than 30% from a year earlier. They forecast sales of $1.59 billion, up from $1.04 billion.
Tencent declined to comment on its earnings.
Analysts worry about the short-term impact on margins of the move into more capital-intensive Internet commerce. Tencent is directly distributing some of the electronics products being sold on its new platform—on the theory, the company says, that having greater control over the user experience will allow it to attract more users—and it is leasing warehouses for the inventory.
One smaller project that has helped Tencent cultivate a new market is WeChat, a mobile chat service that offers integrated voice, text and photo sharing as well as services for meeting new people in the area. Launched in January 2011, the service had been downloaded more than 100 million times by the first quarter of 2012. WeChat's user base includes much of China's smartphone-owning middle class, a highly attractive target for advertising, but Tencent says it is still improving user experience and has no plans to make money off the service yet. Unlike many of its social-media competitors, it can afford to wait.
Tencent's speedy execution of new projects like WeChat has led Chinese technology entrepreneurs to coin the phrase "life, death or Tencent"—meaning the choice is between cooperating with Tencent or being crushed by it, so unlikely is the option of outcompeting it.
When upstart smartphone company Xiaomi launched a mobile-chat service in 2010, Chief Executive Lei Jun told a conference in May, it expected Tencent to take a while to launch a rival service.
"We thought maybe it would take six months," he said, but in fact WeChat was out within two months—and it has proved far more popular than Xiaomi's service.
Write to Paul Mozur at paul.mozur@dowjones.com and Juro Osawa atjuro.osawa@dowjones.com
Corrections & Amplifications
Facebook's market value is about $59.2 billion, compared with Tencent's $54.2 billion, based on both companies' Monday closing price. An earlier version of this article incorrectly stated that Tencent's market capitalization had recently topped Facebook's.

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