Warning – this one is straight from the rumor mills, but has been reposted on more than 3 dozen Chinese news sites according to Baidu News Search. The original source is Chinese IT news portal DoNews (in Chinese).

China Mobile Ltd.’s ((ADR) NYSE: CHL) CEO Wang Jianzhou and a team of senior executives visited Tencent Holdings Ltd. (HKG: 0700) headquarters on Dec 31st, 2009, and were received by Tencent President Martin Lau Chi Ping.  According to QQ.com (owned by Tencent), the Tencent management team showcased their R&D and applications in wireless Internet; whereas DoNews speculates that such a visit cannot just be for some demos, but is in fact to re-initiate discussions of China Mobile acquiring Tencent. According to an “industry insider” (DoNews’ anonymous source), China Mobile has been interested in buying Tencent ever since the era of its previous CEO Wang Xiaochu (who stepped down in late 2004).

It’s true that China Mobile has always seemed very serious about getting into the content side of the business, and is determined to be not just the “dumb pipe”. It developed in-house Fetion, which is an also-ran in the instant messaging market whose main value proposition is free text messaging to mobile phones. That feature helped the service gain a decent number of users, bust I guess most users are like me – I only log on when I need to send some text messages to my friends and I log off immediately afterwards (you get SMS notification if others reply). Buying Tencent would obviously give China Mobile a range of extremely profitable Internet properties and help it achieve its ambition in content; the doubt would be whether there could be any synergies actually realized – the AOL-Time Warner deal immediately jumps to mind.

Taking a step back, the high profile visit at least signals that some form of discussions is ongoing, and there will probably be at least some partnership deals coming soon. It will be interesting to see what comes out of this in the near future.

Tencent Holdings Limited (HKG: 0700 | (ADR) PINK: TCEHY) announced impressive Q3 results on Nov. 11th (WSJ article, Tencent 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.)