Tencent Continues Run as Best-Performing Stock in HK This Year with Q3 Results

The following is my latest post on Digital East Asia.

Tencent Holdings Limited (HKG: 0700(ADR) PINK: TCEHY) announced impressive Q3 results on Nov. 11th (WSJ articleTencent PR). Quarterly revenues were USD 493.3 MM, 17% QoQ growth and 66% YoY growth; profit growth was even more impressive at USD 209.9 MM (42% net margin), 19% QoQ growth and 92% growth YoY. And as a Bloomberg articlenotes, Tencent has been the best performing stock in the Hang Seng Index this year.

Not all segments were growing though. While Internet VAS (QQ Zone, QQ Games) grew 22% QoQ and represents 78% of total revenue, Mobile VAS dropped 5% QoQ and accounted for 13% of revenue, and the outlook continues to be uncertain despite 3G networks being rolled out. Online advertising grew 20% QoQ and accounted for 9% of revenue, however, outlook for the next quarter seemed poor:

“Sustainability of the recovery in the advertising market is still uncertain… We also expect our search-based advertising revenues to reduce substantially due to amendments to service contract with our partner and the gradual transition into our self-developed search engine.”
– Mr. Ma Huateng, Chairman and CEO of Tencent Holdings Limited.

The ad recession issue aside, Tencent’s fundamentals look great. Active users of QQ increased to 485MM (in comparison, Facebook has >300 MM); peak concurrent users were 75MM (in comparison, Skype has around 20MM peak concurrent users). In terms of monetizing its massive user-base, Internet VAS paying subscribers reached 48MM, a 20% QoQ growth – this is one of the drivers of that impressive top-line growth.

The other driver is of course online games, which generated 58% of Internet VAS revenue (45% of total revenue) and grew 23% QoQ, though Tencent management noted that it was driven by strong summer holiday seasonality. Management also notes that they were facing strong competition from SNS casual games. As an interesting side-story to this, last month rumors surfaced (and then denied) that Tencent had acquired the developers of Happy Farm, the ridiculously addictive casual game that inspired Zynga’s FarmVille. Some people estimate that Tencent was grossing USD 8MM a month on Happy Farm, which would be strong reason to acquire the company while it was still small. (Tencent’s M&A head was actually at Berkeley Haas last week for recruiting, though he was very secretive about their deals, only commenting that they have been very active.)


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