Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
DECEMBER	2016
COMPANY REVIEW
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016
Along with traditional financial analysis, from time to time OLMA Next ...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 3
INTRODUCTION
OVER 73% OF SOCIAL MEDIA USERS IN CHINA ARE USING A TENC...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 4
INTRODUCTION
Tencent's founder and CEO, Ma Huateng, launched the Comp...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 5
MA HUATENG: CEO
Before 1998: Internet paging system research and deve...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 6
PRODUCTS & SERVICES GLOBAL OVERVIEW
SOCIAL
CONTENT
ENTERTAINMENT
UTIL...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 7
TO DATE
AlibabaTencent Baidu AlibabaTencent Baidu
5.3
4.8
2.7
363
1,0...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016
’08
8
TIMELINE
FOUNDED
’98 ’04’02
QQGame
portal
’03 ’10’09 ‘12 ’15 ’16’...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016
Payment - Tenpay
From work, she sends
money to her friend via
Tenpay fo...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016
20% 40% 60%
10%
70%
80%
60%
50%
40%
0%
100%0%
30%
20%
Revenue from user...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 11
SOCIAL: QQ/WECHAT-WEIXIN (2/3)
246
17.5%
35.0%
52.5%
70.0%
706
27127...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 12
SOCIAL: QQ/WECHAT-WEIXIN (3/3)
Lionel Messi’s WeChat billboard in Ho...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 13
ENTERTAINMENT: GAMES (1/2)
2011 2012 2013 2014 2015 2016e 2017e 2018...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 14
ENTERTAINMENT: GAMES (2/2)
Tencent
Sony
M
icrosoft
Activision
Blizza...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 15
CONTENT: TENCENT CONTENT CREATOR/PUBLISHER BUSINESS
CONTENT
For much...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 16
UTILITIES: E-RETAIL
Market Cap
AlibabaJD.com
27.5
193
Revenue
Alibab...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 17
PAYMENT: WEPAY/TENPAY
2014 2015 H1 2016
20%
100%
H2 2016
80%
60%
40%...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 18
TENCENT VENTURE CAPITAL PORTFOLIO
87
20
0
40
60
80
100
120
140
160
8...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 19
MATRIX: PORTER 5 FORCES
LEVEL OF COMPETITION: HIGH
High growth fuele...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 20
MATRIX: SWOT
INSIDE
OUTSIDE
Sound business model: Tencent’s successf...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 21
MATRIX: PEST ANALYSIS
+ / - China web industry highly regulated
- Ce...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 22
Q&A
2012 2013 2014 2015
Revenue
Net profit
2.0
1.5
1.0
0.5
$billion
...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 23
Q&A
Replica of the Austrian alpine town Hallstat in Guangdong Provin...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 24
Q&A
WeChat and WhatsApp dominate different markets, but WeChat is a ...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 25
Q&A
Media &
gaming
VIPshop
Ctrip
SouFur
58.com
Social
media
Search
e...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016
-200%
-100%
0%
100%
200%
-1000
2000
5000
8000
11000
14000
17000
2015201...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 27
SHAREHOLDING STRUCTURE, FUNDING ROUNDS AND M&A DEALS
DATE AMOUNT / R...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016
HKD per share
28
STOCK ANALYSIS
2016
70
130
190
230
210
50
2013 2014 20...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 29
CONCLUSION
TENCENT’S NEW NBBJ-DESIGNED HEADQUARTERS,
WHICH FEATURE H...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 30
SOURCES (1/2)
PAGE 4
https://www.techinasia.com/talk/wechat-valued-a...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016 31
SOURCES (2/2)
PAGE 24
http://www.smithstreetchina.com/content_multim...
TENCENT COMPANY REVIEW
OLMA	NEXT	LTD DECEMBER	2016
Subscribe to OLMA Next’s free newsletter
to get access to Case Study Nº...
Upcoming SlideShare
Loading in …5
×

Tencent Company Review - December 2016

7,217 views

Published on

OLMA Next presents this Company Review for Tencent, one of a number of high performing stocks on the American, European and Asian markets.
This report is intended to provide readers with sufficient data and insight to gain a thorough understanding of the big picture behind the world’s fourth largest Internet services company.
The report also highlights the vision of Tencent CEO Ma Huateng, that has made Tencent the most valuable company in Asia, beating Alibaba and Samsung, and one of the top ten in the world by market capitalisation. Tencent achievements rely on a wide and efficient diversification of its products and services through a coherent set of portals and platforms. Together, they have become a solid multi-platform digital ecosystem, with a market leading position in each of their sectors.

Published in: Economy & Finance

Tencent Company Review - December 2016

  1. 1. DECEMBER 2016 COMPANY REVIEW
  2. 2. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 Along with traditional financial analysis, from time to time OLMA Next Ltd commissions independent researchers to prepare challenging studies and reviews connected with potential investment ideas and projects. This company review has been prepared by Frédéric Bonelli at the request of OLMA Next Ltd. We are pleased to share this work about Tencent Holdings Limited (SEHK: 700) with you. We hope it will shed light on what makes this Internet giant unique by providing you with thoroughly researched data and helping you gain a more in-depth understanding of the world’s fourth largest Internet services company. 2 ABOUT THIS WORK You are welcome to share and adapt this work Please cite this document as follow: fredbonelli.com, Tencent Holdings Limited, Company Review, Dec 2016 You may distribute a modified version of this work subject to the consent of Frédéric Bonelli OLMA Next Ltd is contemplating the launch of a fund focused on future blue chip stocks. With a combination of youth and experience, OLMA Next Ltd plans to scrutinise a number of high performing stocks on the American, European and Asian markets over the coming months. www.olmafund.com OLMA Next Ltd Frédéric Bonelli is an independent research consultant and VC entrepreneur who prepares content about trends and companies for funds and investors. He also helps start-ups and SMEs to produce corporate support materials to help with fundraising and other promotional activities. contact@fredbonelli.com Frédéric Bonelli
  3. 3. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 3 INTRODUCTION OVER 73% OF SOCIAL MEDIA USERS IN CHINA ARE USING A TENCENT PRODUCT WeixinQQ MOBILE SECURITY #1 by MAUs MOBILE BROWSER #1 by MAUs APP STORE #1 by MAUs LITERATURE #1 Digital publisher MUSIC #1 master licensor of music copyrights #2 mobile app; Top 3 on PC ONLINE GAMES #1 in multiple genres across PC and Smartphones NEWS #1 mobile app #2 on PC VIDEO #1 by MAUs IN LESS THAN TWO DECADES TENCENT HOLDINGS LTD HAS RISEN TO BECOME ONE OF THE WORLD'S LARGEST INTERNET SERVICES FIRMS THROUGH ITS INNOVATIVE TAKE ON WEB-BASED SOCIAL MEDIA ECOSYSTEMS AND STRATEGIC PARTNERSHIPS. FROM ITS NUMBER ONE POSITION IN CHINA, WILL IT BE ABLE TO TAKE THE WORLD BY STORM? 1 MAUs: Monthly Average Users
  4. 4. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 4 INTRODUCTION Tencent's founder and CEO, Ma Huateng, launched the Company in 1998 to market an Internet messaging service – OICQ. It was a copy of ICQ messenger, a product of the Israeli firm Mirabilis. The name was later changed to QQ1 . Tencent was initially criticised for copying western products, but none of the major Western Internet companies had thus far been successful in China. Tencent's growth quickly came through its knack for adapting and localising western products to the Chinese market, either through strategic partnerships or by launching upgraded Sinicised copies. Ma has shown exceptional talent and efficiency in his corporate vision, especially so over the last decade through several major strategic moves such as: 1. The development of a disruptive business model based on value-added services3 while other majors were almost solely seeking advertising revenues. 2. A strong offensive in the mobile game sector. Tencent reached the nº1 position worldwide following the Supercell acquisition by earning 12% of all global game revenues in 2015. 3. A successful bet on user transition to mobile platforms with WeChat (known as Weixin in China), the leading Chinese instant messaging (IM) App. WeChat provides 50% of Tencent’s Market Cap to date. 4. The use of WeChat’s 800 million strong user base to enable WePay to catch up with Alibaba’s Alipay payment platform. This user base provides a huge competitive advantage to complement Tencent’s leading position in the mobile apps market. Tencent owned half of China's top ten mobile applications by monthly active users in 2015 and 2016. Eventually, Tencent created an entire ecosystem based on QQ/WeChat, and was able to gain considerable traction in the domestic Chinese market. Tencent's share value increased from HKD0.81 ($0.10) in June 2006 to HKD217 ($28) in October 2016 (x267), with a four-fold increase in the last four years alone. Now, with a market capitalisation of HKD 2.06tn ($267bn), Tencent is one of the world's 10 largest publicly listed companies and Asia's largest. With a healthy financial situation and positive outlook, Tencent began a strategy of growth through investment in a wide variety of sectors, from insurance to ride sharing, including movie production and even electric auto manufacture to name a few. 1 Due to a copyright infringement issue with ICQ 2 Rules are different in China for foreign digital companies, as the Facebook government-sanctioned block demonstrates 3 VAS: Sale of upgrades, such as costumes for online game characters, personalised wallpapers for chat rooms, VIP profiles, and other services to users of its extensive ecosystem of online games, social media networks and instant messaging apps Google Amazon.com Facebook Tencent Alibaba Baidu eBay 555.58 387.63 369.21 259.1 255.66 60.88 37.72 CHINA’S DISCREET INNOVATOR: TENCENT Market value of the largest Internet companies worldwide as of October 2016 ($bn) Tencent 3Q 2016 earnings highlights Market Capitalisation of $259.1bn $5.382bn in revenue (+52% YoY) $2.161bn in operating profit (+43% YoY) 10 20 40 60 80 100 Tencent Sina Baidu Google Facebook 15.9 0.5 10.3 74.5 17.9 Internet firm revenue by source, 2015, (% of total and $bn) TENCENT DISRUPTIVE BUSINESS MODEL Value-added services Advertising Other e-commerce From emulation to innovation
  5. 5. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 5 MA HUATENG: CEO Before 1998: Internet paging system research and development at China Motion Telecom Development Limited, a supplier of telecommunications services and products in China 1998: Launch of Tencent with first earnings from playing the stock market. Launch of an ICQ copy named OICQ (Open ICQ), later renamed QQ 2004: Tencent became the largest Instant Messaging service in China. Ma named a global business influential by Time magazine. Also named one of the top ten economic influentials in innovation by Beijing’s China Central Television July 2004: Tencent IPO January 2014: The International Consortium for Investigative Journalism uncovered Ma Huateng offshore assets held by the Virgin Islands registered company TCH Pi Limited June 2016: Ma named the most generous philanthropist in the ethnic Chinese world after donating $2.15bn over a single year July 2016: Ma donated 100 million of his Tencent shares, estimated to be worth RMB1.39bn ($201m), to a charity fund that supports healthcare, education, environmental protection and other efforts in mainland China “Imitation is the safest innovation.” HUATENG ‘PONY’ MA - CO-FOUNDER AND CEO OF TENCENT AGE SOURCE OF WEALTH RESIDENCE CITIZENSHIP MARITAL STATUS NET WORTH1 : $25.1bn 45 Internet services, Self Made Shenzhen, China China Married - 1 child EDUCATION 1993: Bachelor of Art/Science (Computer Application) from Shenzen University DATE COMPANY POSITION Jan 1998 - unknow Tencent Chairman of the Board of Directors BOARD & ADVISOR ROLES DATE COMPANY TITLE Nov 1998 - now Tencent Funder, Executive Director and CEO June 2007 - now TCH Pi Limited Assistant Director 1993 - unknow China Motion Telecom Head - R&D JOBS POLITIC Deputy to the 12th National People’s Congress 1 as of October 2016
  6. 6. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 6 PRODUCTS & SERVICES GLOBAL OVERVIEW SOCIAL CONTENT ENTERTAINMENT UTILITIES PAYMENT QQ WEIXIN WECHAT RTXTENCENT MESSENGER QQ ENTREPRISE WECHAT WEIXIN ENTREPRISE QQ DOCTOR QQ PLAYER QQ PINYIN QQ SOFTWARE MANAGER JD.COM QQ DOWNLOAD FOXMAIL SUPER QQ QQ MOBILE GAME 3G QQ QQ MOBILE TENPAY QZONE QQ.COM QQ MUSIC QQ SHOW QQ VIP QQ LIVE PENGYOU CITY ELITE QQ MAIL TENCENT LITERATURE QQ BOOK QQ VIDEO MMOG FPS Q-EDITION MMOG QQ GAME DESKTOP QQ GAME INTERNET MOBILE GAME PLATFORMS WECHAT WEIXIN PAY QQ WALLET QQ BROWSER TENCENT WESECURE CONTENT PLATFORMS … … … IM PLATFORMS SOCIAL NETWORK SERVICES VALUE ADDEDD SERVICES EMAIL PLATFORMS BTOB IM PLATFORMS TENCENT OPEN PLATFORM APP PLATFORMS REVENUE STRUCTURE Internet value-added services Mobile value-added services Advertising Other including e-commerce SUPERCELL STUDIO OCT 2016 ACQUISITION + PRODUCTS & SERVICES Social media portal and apps Entertainment and games Content portals Payment services (Internet and mobile) Utilities such as AppStore WECHAT/WEIXIN GAME DIANPING DIDI … 1 Internet and mobile INTERNET MOBILE INTERNET MOBILE
  7. 7. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 7 TO DATE AlibabaTencent Baidu AlibabaTencent Baidu 5.3 4.8 2.7 363 1,075 1,641 4 2 0 0 500 1,000 1,500 CHINA POPULATION 1,368 MILLION ACTIVE SOCIAL MEDIA USERS624 MILLION ACTIVE MOBILE SOCIAL MEDIA USERS557 MILLION ACTIVE INTERNET USERS688 MILLION Penetration: 50,3% YoY : +11.3% ACTIVE MOBILE PHONE INTERNET-ACCESS USERS620 MILLION Penetration: 41% YoY : +6.2% ONLINE PAYMENT USERS416 MILLION MOBILE PAYMENT USERS357 MILLION Penetration: 57.7% YoY : +64.5% 1 Internet and mobile DIGITAL TRENDS IN CHINA January 2016 From Tencent’s early Internet messenger copycat QQ to its market leading mobile instant messenger WeChat, Tencent achievements rely on a wide and efficient diversification of its products and services through a coherent set of portals and platforms. Together, they have become a solid multi-platform digital1 ecosystem, with a market leading position in each of their sectors. As of October 2016, Tencent had become the most valuable company in Asia, beating Alibaba and Samsung, and one of the top ten in the world by market capitalisation. However, to maintain and strengthen its market leading position while retaining its impressive growth trend, Tencent faces several unique challenges: Tencent is now the most valuable company in Asia 1. Can it manage to keep the other Chinese e-giants such as Alibaba and Baidu at bay in the face of their staggering growth? How does Tencent manage to strengthen its lead over them? 2. Will Tencent’s diversification strategy spread it too thin and bring a loss of synergy? Does it risk losing focus? 3. Can Tencent sustain growth beyond the Chinese market? Will it be able to replicate its domestic success internationally while competing against major Western companies such as Google or Facebook with their multicultural experience? “Tencent is great at monetizing eyeballs […] That’s their core competency. They are making tons of money by scraping together pennies from tiny transactions.” JEFF WALTERS, PARTNER AND MANAGING DIRECTOR BOSTON CONSULTING GROUP'S BEIJING OFFICE 2Q 2016 ($bn) REVENUE 2Q 2016 ($bn) PROFIT
  8. 8. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 ’08 8 TIMELINE FOUNDED ’98 ’04’02 QQGame portal ’03 ’10’09 ‘12 ’15 ’16’01 IVAS start ’05 ’06 Tenpay Paipai ’14 Zhong An Online Insurance Sogou search & browser ’13 Mobile QQGame Mobile Weixin 
 Game Centre ’99 ’00 MVAS start ’11 WeChat Weixin ’07 HBO & Warner Music Group rights for China Deal with Foxconn to mass produce self-driving electric cars by 2020 NBA rights for China QQ WePay QQ WALLET WeChat Weixin Entreprise Majority stake Minority stake GAMES Supercell studioRiot GamesDungeon and Fighter Cross Fire1 Riot Games (League of Legends) - Epic Games 
 - Activision Blizzard UTILITIES VC Hike messenger (India) SOCIAL Douyu TVCONTENT JD.com3 China Music Corporation Bitauto Didi Dache (chinese Uber) 58.com2 Qzone MMOG DISTRIBUTION & PARTNERSHIPS PRODUCTS & SERVICES M&A deals: IPO launch 09/2013 
 MARKET CAP : 
 100 BILLION USD 09/2015
 MARKET CAP : 
 200 BILLION USD 10/2016
 MARKET CAP : 
 263 BILLION USD MARKETCAP MILESTONES China South city Dianping KakaoTalk (South Korea) Kik (Canada) Practo (India)
  9. 9. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 Payment - Tenpay From work, she sends money to her friend via Tenpay for the concert tickets. 9 PRODUCTS & SERVICES: TENCENT USER JOURNEY MAP Content - Sohu TV Mei Mei enjoys her breakfast while watching Sohu TV Social - WeChat She receives a WeChat message from her friend inviting her to go to a concert after work. SNS - Didi She orders a cab to get to work using Didi Chuxing (similar to Uber). SNS - Dianping On her way to work, she looks for restaurant ideas on Dianping and books one. Search engine - Sogou Over lunch, she looks for an old high school friend’s WeChat profile to get in touch. Content - Pengyou She also asks high school friends she’s linked with on SN Pengyou about her friend. IM pro - WeChat entreprise At work, she uses WeChat entreprise to speak with colleagues from different business units about different projects. Content - QQ Music After work, she walks to the concert listening to a playlist on QQ Music. Payment - WePay She goes to a Pharmacy and purchases throat sirup, paying with a WePay generated QR code on her smartphone. Utilities - Tencent Maps Mei Mei shares her location with her friends through Tencent Maps. Social - Pitu Just before the concert, she makes a fun picture with cat ears and whiskers and sends it to friends. Social - Weishi During the concert, she makes a Vine with Weishi and posts it online. Social - QQ live Her friend Ling can watch some of the concert live and see Mei Mei in the crowd as she broadcasts the event from her smartphone! Social - QQ.com After the show she reads reviews about the show she just attended. Entertainment - QQ games She plays the latest Chinese version of Clash of Clans on QQ for a few minutes. E-retail - JD.com Before going to bed, Mei Mei orders a lovely Italian Coffee pot only available on JD.com. Tencent’s strategy lies in creating a social and shopping universe that users never need to leave. This means investing and/or signing deals with dozens of retailers and service providers, and connecting them with WeChat’s hundreds of millions of potential customers. Most importantly, this means controlling the payment system that links this universe together—which could add billions of dollars to Tencent’s top line. A day in the life of the modern Chinese consumer with Tencent products & services
  10. 10. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 20% 40% 60% 10% 70% 80% 60% 50% 40% 0% 100%0% 30% 20% Revenue from users OperatinProfitMargin 10 SOCIAL: QQ/WECHAT-WEIXIN (1/3) QQ has more users than Linkedin, Instagram and Twitter combined 1 UI: User Interface, UX: User Experience SOCIAL Initially, QQ was launched as the exact copy of ICQ, a late 90’s free online instant messaging system. However, a top-level UI/UX1 redesign aimed at the Chinese market and a specific value- added services business model caused QQ’s popularity to explode and reach levels unseen by any other messaging software in China at the time. Helped by the fast growing QQ user base, Tencent’s success lies in Ma’s insightful strategies: 1. Maintain a consistently top-level UI/UX1 for every product, service or content. Tencent tackles this issue by encouraging internal competition between design and development teams. 2. Use ”think outside the box”  philosophy to develop business models. Unlike his competitors, Ma rejected reliance on an advertising-only model and established Tencent with value-added services in mind as the primary revenue source. 3. Continuously exploit QQ’s user base, its core resource, to diversify and increase revenue streams through various means such as games, portal websites, music, blogs and more. Tencent took a competitive advantage by exploiting its QQ users to support every product launch as seen with WeChat for example. 4. Anticipate a future in mobile services and address the transition from personal computers to mobile devices, from traditional internet to mobile networks (3G, 4G) with dedicated made-for- mobile products. To this day, the QQ brand is still very strong and remains an iconic social media precursor from the PC/Windows XP era in China. This helped Tencent to manage a very soft and relevant transition to the WeChat mobile ecosystem. Both QQ and WeChat platforms initially shared the same user base but they have evolved over time and now thrive upon different user bases with different expectations. First, there was QQ Started in 1999 as a copy of ICQ desktop messenger Launched during Windows 98/XP/PC/early DSL internet era Does not require a linked phone to register, thus targeting young users Integrated a payment function in 2014 (15 years after launch) Targeted user base: teenagers/younger users Considered to be a Chinese-market-only messaging app Offers many youth-oriented value-added services Has a huge content and user-generated content portal QQ QQ QQ MOBILE QZONE QZONE MOBILE WECHAT 1Q 2016 NUMBER OF USERS +5% YoY +9% YoY -3% YoY +4% YoY +29% YoY 877 million 658 million 648 million 588 million 762 million Value-added Services paid by users vs advertising revenue THE QQ/WECHAT BUSINESS MODEL
  11. 11. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 11 SOCIAL: QQ/WECHAT-WEIXIN (2/3) 246 17.5% 35.0% 52.5% 70.0% 706 271272281293 231 244 0% 553 200m 400m 600m 800m 345 W echat Q Q Taobao TencentVideo Baidu Alipay W eibo iQ iyiQ Q Brow serKugou M usic 0 200 400 600 800 1,000 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2011 2012 2013 2014 2015 806 Downloads (RHS) YoY growth (LHS) SOCIAL Mobile internet has taken a firm hold in China; the country boasts one of the highest smartphone penetration rates in the world. However, the fragmented nature of the Chinese apps marketplace spells potential challenges for hardware manufacturers and platforms alike. WeChat’s successful and market leading position stems from a good launch momentum, a top- level UI/UX adapted to Chinese users and Ma’s vision. Ma envisioned WeChat as an operating system that would primarily serve as a means for consumers to discover and download apps or games, but to also buy consumer goods and services on their smartphones. This was the “apps-within-an-app” WeChat-specific disruptive model that perfectly matches modern app-centric Chinese users. Tencent has an app inside WeChat for most any need that can be met through a mobile phone, and if unmet, Tencent is likely working on it. As of October 2016, WeChat is the most popular mobile app in China and QQ is second. Mobile Messaging + e-commerce + Advertising = WeChat Launched in 2011 and thought to be based on WhatsApp Launched in the Apps/Mobile/3G-4G era Requires a cell phone number to register Included a payment function (WePay) from day one Targets more mature and high-end users Positioned as an international messaging app but most users are Chinese Offers many location-based features such as identification of nearby users Offers many features for business to create subscription service accounts It is a huge content and user generated content portal WEIXIN - WECAHT 9 out of 10 urban Chinese online consumers use a smartphone - 5 out of 10 use a tablet CHINA’S MOST POPULAR APPS March 2016 WECHAT USER BASE Number of accounts (m) SMARTPHONE TABLET US 67% 40% EU-7 68% 32% Mainland China 90% 49% GLOBAL CONSUMER MOBILE DEVICE USAGE (2014)
  12. 12. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 12 SOCIAL: QQ/WECHAT-WEIXIN (3/3) Lionel Messi’s WeChat billboard in Hong Kong The advantage of WeChat over other retail and services platforms is the ability for businesses to communicate directly with customers. The cornerstone of the WeChat model is payments, which are managed through a portal that is a completely separate component of the app. This portal, separated from the “apps-within-an-app” accounts platform, is an e-wallet that has a menu of carefully curated and pre-selected service providers that users can transact with after inputting payment credentials. WeChat Pay provides an instant, frictionless payment method that can be used with all authorized businesses that sell products or services on WeChat. In China, use of the WeChat Payments platform is growing so quickly that WeChat is experimenting with processing payments offline via QR codes at brick-and-mortar stores, live events, vending machines, restaurants, hotels, highway toll booths and more. The result is a network that grows by feeding on itself. Indeed, as more businesses accept this form of payment, more users are encouraged to jump on board, benefitting businesses and customers alike. User adoption and this portal model have given Tencent an almost godlike power in the Chinese apps world and by association, with Internet startups in China. Partner companies that are selected to be part of the WeChat Wallet portal obtain instant exposure to hundreds of millions of users. As of early 2016, more than 200 million people were using WeChat payment solutions and more than 300,000 offline stores accepted WeChat payments. Moreover, Demystify Asia estimated that more than 8,000 brands are currently using the app. Finally, according to Tim Cook, during Apple’s most recent earnings call, WeChat is one of the top 3rd-party apps used on the Apple Watch. From messenger to marketplace of population aged 16-65 use WeChat Average amount of time users spend on WeChat daily Purchase products online WeChat / WhatsApp / Facebook average revenue per user/year 68.6% 40 minutes 83% $7 / $1 / $3.3 WeChat shows the infinite possibilities when brands are offered more options for interacting with their users. For example, Starbucks may post offers for its followers on its Facebook page, but with WeChat users can inquire about their Starbucks gift card balance, place drink orders, find the nearest store or receive promotions tailored to individual drink preferences based on the weather in the user’s city that particular day. “We first established an account on WeChat in June 2013 and have had really good traction so far. Our WeChat fan base grew very rapidly and it drives really good traffic to our e-commerce site as well. It’s actually one of the first times that we’ve seen a social site driving a large number of e-commerce sales.” JULIEN CHIAVASSA - DIGITAL HEAD APAC FOR CLARINS
  13. 13. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 13 ENTERTAINMENT: GAMES (1/2) 2011 2012 2013 2014 2015 2016e 2017e 2018e 20% 40% 60% 80% 100% 76.0 72.3 65.7 56.3 45.8 30.1 11.6 13.1 16.6 25.0 39.2 49.9 Client game Web game Mobile game 56.7 60.5 32.937.8 9.4 10.4 12.2 15.1 18.7 17.7 14.612.4 4% 2016 $99.6bn TOTAL 47% 24% 25% ASIA-PACIFIC $46.6bn +10.7% YoY of 2016 growth of the global games market comes from Asia-Pacific of 2016 revenues of the global games market comes from Asia-Pacific million people - the population of Asia-Pacific in 2016 persons from Asia-Pacific is a gamer (plays at least to one game regularly) 58% 46.8% 4,008 1 of 4 8% 2016 $46.6bn TOTAL 52% 27% ENTERTAINMENT 2016 GLOBAL GAMES MARKET VALUE Split per region 2016 ASIA-PACIFIC MARKET FOCUS Split per country With a population four times greater than the United States and double the number of netizens, China is the largest game market worldwide as of 2015. It will account for 25% of the estimated global $99.6bn game revenue for 2016. The Indian game market, driven primarily by the mobile segment, is expected to break the billion dollar mark in 2018, representing an impressive CAGR of +49.2% for 2014-2018. This makes India one of the fastest growing game markets in the world. It is on its way to become a major global player. Tencent has made several investments in India, notably in Hike, the  Indian equivalent of WhatsApp with $175m at a $1.4bn valuation. Mobile gaming is leading growth and will also soon lead by volume Mobile gaming revenues will continue to be the largest segment in the coming years, with the mobile phone segment growing faster than tablets (expected CAGR of 16.2%). Mobile phone gaming is expected to become the main segment by 2018, therefore strengthening Tencent’s leading position. China leading a strong growth market MARKET STRUCTURE OF CHINA ONLINE GAMING 0% NORTH AMERICA $25.4bn +4.1% YoY LATIN AMERICA $4.1bn +20.1% YoY EMEA $23.5bn +7.3% YoY CHINA $24.4bn CHINA $24.4bn JAPAN $12.4bn SOUTH KOREA $4.1bn AUSTRALIA $1.2bn TAIWAN $0.99bn
  14. 14. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 14 ENTERTAINMENT: GAMES (2/2) Tencent Sony M icrosoft Activision Blizzard EA Apple NetEase Google Ubisoft Nexon 2.1 2.6 1.9 1.6 1.5 1.3 1.2 0.9 0.8 0.7 0.5 1.3 1.3 1.4 1.2 1.0 0.5 0.7 0.2 0.4 Q1 2015 Q1 2016 +29% +40% +13% +14% +10% +20% +86% +24% +276% +19% Tencent NetEase Others 50% 63% 8% 5% Android Apple ENTERTAINMENT MOBILE eSPORT GAMES IN CHINA Split per app publisher TOP 10 PUBLIC COMPANIES BY GAMING PRODUCT REVENUES 1Q 2015 vs 1Q 2016, ($bn) of Top 100 Grossing Games on Android are eSport titles of Top 100 Grossing Games on Apple are eSport titles of the Game market is generated by Tencent revenue generated in 2015 for Tencent + Supercell 24/100 19/100 12% $11.1bn Traditional media companies see e-sports as a way to engage with millennials and to make up for the aging traditional sports viewer segment. Many non-traditional sponsors are following in the stream of these initiatives. Tencent is by far the leader in this sector on the Chinese market, but its competitors also seek their share. In July 2016, Alisport (Alibaba) announced a $150m partnership with the International e-Sports Federation (IeSF) that would see the building of “e-Sports Stadiums” around China, hoping to make e-Sports a way of life. Mobile eSport games: China & Tencent are leading In May 2016, Tencent alone accounted for an overwhelming 44.5% of the revenues of the top 100 grossing Android games, publishing 23 of the top 100 titles. However, most of its success and revenues still came from China and Chinese language games. Now this trend is turning with the acquisition of the Finnish mobile games company Supercell, creator of the  Clash  game series. Supercell’s titles consistently dominate mobile revenue rankings: Clash Royale and Clash of Clans earned a combined $193m in April 2016, ranking second and third respectively. Unlike Tencent’s current roster of mobile games, most of the Clash earnings come from outside China. The Clash series along with Boom Beach and Hay Day are popular around the world on smartphones and tablets alike. Analysts at the Chinese market research firm Niko Partners predict that mobile gaming could grow to $11.1bn annually by 2019 in that region alone. Tencent stands to earn a huge return on its investment by simply feeding games like Clash Royale to its player base. Tencent: King of the hill of mobile gaming “Indirectly, Tencent partially controls about a third of the revenues generated by the top 10 global companies, according to game revenues”. PETER WARMAN - NEWZOO CEO
  15. 15. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 15 CONTENT: TENCENT CONTENT CREATOR/PUBLISHER BUSINESS CONTENT For much of its history, Tencent was satisfied to generate revenue through value-added services and more precisely, from online games. Historically, advertising never represented more than a fifth of Tencent revenues. However, this is changing quickly and advertising revenues grew 73% year-on-year during the first quarter of 2016 with approximately 80% generated through Tencent’s mobile platforms. In early 2015, Tencent started to display ads to its users via its WeChat Moments timeline feature, which is similar to the Facebook wall. Since then, the Company has made more ad formats available to advertisers, including video. Over the summer 2015, Tencent opened WeChat Moments ads to all advertisers, expanding with such big name brands such as Coca Cola and Mercedes-Benz. Tencent’s shopping spree for premium content from Game of Thrones to NBA broadcasts once again helped the Company to defy investor expectations and a slowing Chinese economy. Second quarter sales and profits were once again above most analyst estimates as Tencent splashed out on mobile games and content for WeChat and QQ, including anything from Anime to novels. That strategy paid off as users surged and online advertising revenue swelled 60% in Q2 2016, obliterating fears of global marketing cutbacks. Tencent is paying upfront for expensive glossy entertainment broadcasting rights to tap the purchasing power of its billion-plus users and appeal to advertisers. Overall costs for Tencent have almost doubled in the last quarter. Tencent has explained that it needs to hold its own against Alibaba and search giant Baidu in the digital entertainment sector. Tencent Video is toe-to-toe with Alibaba’s Youku Tudou and Baidu’s IQiyi. Tencent’s online advertising business raked in 6.5 billion yuan ($980 million), fueled by its video streaming service. Streamed NBA games attracted twice as many unique viewers this season than it did the year before. The Company has entered into Periscope-like live-streaming with “Now,” a new service designed to capitalise on the live-streaming phenomenon that is taking China by storm. Tencent's advertising revenues have risen so fast in the past two years that they now represent 39% of total ad sales generated by Baidu, whose main revenue stream is online advertising. Advertising and content publishing: Tencent pursuing growth “This partnership combines the best of talent and technology within WPP and Tencent. Fostering innovation in the social sphere is key in today’s world of hyper-connectivity.” SIR MARTIN SORRELL - FOUNDER AND CEO OF WPP
  16. 16. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 16 UTILITIES: E-RETAIL Market Cap AlibabaJD.com 27.5 193 Revenue AlibabaJD.com 28 15 Sales AlibabaJD.com 71.4 485 +78% +27% +58% +33%YoY growth JD.COM 2015 FIGURES ($bn) UTILITIES Online shopping in China is a highly attractive market. China is the nº1 e-commerce market in the world, and it is expected to reach $1.1tn by 2020, pushing total Asian market online retail revenues to $1.4tn. Overall, e-commerce income for China, Japan, South Korea, India, and Australia will nearly double from $733bn in 2015 to $1.4tn in 2020. According to Forrester Research, these five Asia-Pacific online economies already outpace the combined online retail markets of the United States and Western Europe, with China being the largest and fastest-growing market worldwide. With access to a billion users and the successful growth of WeChat from instant messenger to lifestyle marketplace, Tencent’s next move became obvious: e-commerce. This explains the 2014 Tencent investment in JD.com, the second largest e-commerce platform in China (share to date: 21.25%). However, it is worth noting that Ma’s e-commerce bet is slightly different than Alibaba’s. Indeed, the competitive advantage of JD.com relies upon customer satisfaction through quality control (i.e. no counterfeits), fast deliveries (90% same-day deliveries) and customer satisfaction achieved through purchase of inventory from suppliers, and delivery and installation for the customer if needed. On the other hand, Alibaba pushes third-party vendors to list products on its online platform and sell to customers directly, thereby providing a massive amount of product offerings (SKUs) but uneven service and quality. Currently, JD's SKU offering is 60% less than Alibaba’s Tmall. E-commerce: the logical next revenue stream for Tencent "WeChat has a built-in mobile payment platform, WePay, that links a user’s bank or credit card to all 12 million apps in WeChat’s ecosystem […] WeChat is not merely a social network, but a mobile ecosystem with a heavy focus on e-commerce.” EMARKETER.COM - AUG 2016 MAIN CHINESE E-RETAILERS PER MARKETSHARE millions of users 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 20% 40% 60% 80% 100% 84.3 83.3 84.0 83.9 81.2 80.1 5.2 6.1 5.7 5.7 7.0 8.0 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 20% 40% 60% 80% 100% 47.5 50.8 56.5 63.0 68.4 70.1 52.5 49.2 43.5 37.0 31.6 29.9 % of online shopping GMV via Mobile % of online shopping GMV via PC E-COMMERCE IN CHINA PC vs Mobile Alibaba JD.com VIP Others
  17. 17. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 17 PAYMENT: WEPAY/TENPAY 2014 2015 H1 2016 20% 100% H2 2016 80% 60% 40% 0% ALIPAY TENPAY 6.9 20.6 35.2 53.6 68.4 50 100 150 200 250 300 350 2014 2018 2019 202020172015 2016 63.1 323.3 310.7 280.9 247.9 195.3 134.0 14.5% 28% 38% 45% 47% 48.5% 49% 6.9% 10.6% 13.3% 26.9% 45.8% 112.2% 91.4% % of change % of smartphone users Proximity mobile payment users UTILITIES China’s smartphone users are lightyears ahead of everyone else on the planet when it comes to in- store mobile payments. China is set to have 195 million people who use their phones as a wallet by the end of 2016 according to eMarketer. This represents 38 percent of all smartphone users in the country – which is double the US rate of in-store mobile payments. China is not only the largest mobile payment market in the world, it is also the fastest growing. In-store mobile payments have tripled since 2014 and by 2020 half of China’s smartphone users will have followed suit. China: World leader in mobile payments Tencent’s popular messaging app WeChat, which is used by most smartphone owners in China, has a mobile wallet feature (provided by Tencent’s Tenpay platform) that covers both online and in-store payments. It competes directly with market leader Alipay, Alibaba’s mobile payment app which has over 400 million MAUs. Although Alipay once lead both online and mobile payment segments, Tenpay is rapidly catching-up and is expected to overtake its competitor in the mobile segment by late 2016. Tencent does not generate profits from the payment market; it has been losing money in a bid to gain market share from Alipay. As Wang Xiaoyan, senior analyst at 86 Research in Shanghai explains, “The payment business is just a volume driver, it’s not a profit driver, but it can deliver a lot of data and a lot of user traffic. That’s what Alibaba and Tencent really care about.” Tenpay overtaking Alipay UnionPay is just the latest big state-run company to feel the heat of private sector competition that is shaking up China’s entire financial sector, a sector previously dominated by big state-run companies. Through a state-sanctioned monopoly, UnionPay operates an interbank electronic financial transactions network, similar to global systems like Cirrus or Plus run by MasterCard and Visa. Seeing the exponential success of recent comers in the field of e-payments, UnionPay launched a mobile wallet platform similar to Tenpay or Alipay, but it has been unable to obtain more than a 10% share of China’s online/mobile payment market. Banks: the biggest losers PROXIMITY MOBILE PAYMENT USERS & PENETRATION millions of users and % of change, % of smartphone users THIRD PARTY MOBILE PAYMENT PLAYERS Marketshare in China 82.7
  18. 18. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 18 TENCENT VENTURE CAPITAL PORTFOLIO 87 20 0 40 60 80 100 120 140 160 89 91 93 95 97 99 01 03 05 07 09 11 13 15 1% 0% 2% 3% 4% 5% 6% 7% 8% 9% 10% Share in total Global Outward FDI flows, share of total (%) Annual Outward FDI flows, $bn TYPE OF COMPANY ASSETS LIABILITIES REVENUES PROFIT (LOSSES) TOTAL INCOME FAIR VALUE OF LISTED COMPANIES Listed 8.200 2.881 5.336 -0.260 -0.213 13.002 Non-listed 4.659 1.097 0.917 -0.153 -0.152 Total 12.859 3.978 6.253 -0.414 -0.365 Listed 6.174 1.505 2.923 27.158 33.210 8.347 Non-listed 3.389 0.511 0.655 -78.228 -72.324 Total 9.563 2.016 3.578 -51.070 -39.114 20152014 1 FDI: Foreign Direct Investment China’s economic growth may be slowing but there is no shortage of funds going into its startups, lead by the Chinese government itself. In a bid to ease the slowing Chinese economy towards a consumer product base rather than heavy industry, the country reportedly raised approximatively RMB1.5tn ($216bn) in state-backed venture funds in 2015, according to Zero2IPO. That latest round brought its assets under management to $338bn. Last year was another record-breaker in terms of the number of venture capital deals. According to London-based Preqin, China had a total of 1,737 deals last year, up from 1,060 in 2014. China: the biggest VC firm in the world Tencent is considered to be one of the biggest and most active Chinese VCs. In 2014, the Company invested in four of China’s ten largest tech venture deals and took part in a total of 48 deals worth $6.3bn. Alternative-assets data company Preqin believes that Tencent is a bigger venture capital player than Alibaba, Baidu or even Google. Meanwhile, the flood continued this year with Tencent investing a further $4bn into various ventures without taking into account the $8.6bn SuperCell acquisition. Tencent is more conservative than its rivals. Tencent mainly invests in Chinese companies and startups, unlike rival Alibaba which invested in Snapchat, Shoprunner, Lyft, and TangoMe. Tencent’s only major successes in the United States were their acquisition of Riot Games for $230m in 2011 and their participation to the $150m deal for a stake in New York design site fab.com. “That’s their big problem - getting into the U.S.” says Stephen Bell, a former venture capitalist in China who recently moved back to the United States. Heavy VC activity is a part of Tencent’s business development strategy, as Connie Chan, partner at Andreessen Horowitz explains: “Most of the companies highlighted in the WeChat Wallet portal have taken investment dollars from Tencent, or were launched by them. This might explain why other Chinese Internet giants with similar distribution power (Alibaba, Baidu, Qihoo360, and Xiaomi) have all been doubling down on early stage investments and going head-to-head with China’s top VC firms.” Tencent: amongst China’s biggest VCs CHINA’S GLOBAL OUTWARD FDI1 1987 - 2015, ($bn and share of total OFDI in %) TENCENT PORTFOLIO ($m)
  19. 19. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 19 MATRIX: PORTER 5 FORCES LEVEL OF COMPETITION: HIGH High growth fueled by high demand. Many players are present on the field offering a variety of similar products at similar costs, notably: WhatsApp Facebook’s Messenger Skype Line KakaoTalk INDUSTRY RIVALRY THREAT LEVEL: LOW Most Tencent apps and products are available from online/mobile suppliers such as Google Play or Apple’s iStore. For those suppliers, Tencent brings: high levels of traffic high levels of downloads This makes Tencent an important product for the suppliers. BARGAINING POWER OF SUPPLIERS THREAT LEVEL: LOW Products are: Affordable Innovative Popular Regularly updated Connected Competitive BARGAINING POWER OF BUYERS THREAT LEVEL: HIGH Products are: Switching costs for customers are low to none Customer loyalty is low due affordability of product and current trends making a product or another popular The technology behind most products is easily copied as Tencent well knows THREAT OF POTENTIAL NEW ENTRANTS THREAT LEVEL: MODERATE TO HIGH Most products in the industry are free to use. Trends in the gaming and social networking worlds change on a whim and a variety of substitutes to Tencent products are available free of charge. THREATS OF SUBSTITUTES
  20. 20. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 20 MATRIX: SWOT INSIDE OUTSIDE Sound business model: Tencent’s successful model is carried by its extensive integrated user experience that is delivered through a wide array of interconnected products. Vigorous market position: Tencent is China’s largest Internet and social media company with over 850 million users interacting on its platforms. Steady financial performance: Tencent's shares have risen four-fold since 2012. Its market cap of $267bn makes it one of the world's ten largest publicly listed companies and Asia's largest. Extensive product ecosystem: Through a wide array of products, all linked with one another into a large ecosystem, Tencent is able to seamlessly cross feed its users from one product to another thereby increasing company revenues. STRENGTHS Key investments and partnerships: Tencent has invested heavily in various ventures and established companies in China and abroad to diversify its income streams. Outstanding outlook for Chinese e-commerce: With e-commerce sales growing exponentially in China, Tencent is keen to reap the rewards from its strategic investments in the field and to further develop its e-commerce revenue generating platforms. Online advertising: Unlike other world tech giants, Tencent derives only a small fraction of its income from advertising. Tencent is keen and well positioned to increase advertising revenues with the help of its enormous user base. OPPORTUNITIES Over-dependence on domestic market: Tencent derived almost 94% of its revenues in 2015 from the domestic Chinese market, making it vulnerable to regional crisis and limits on growth. Weak international results: Despite its presence on most continents and increased investments in foreign markets, Tencent’s international growth has been sluggish at best. Brand recognition: Tencent’s pervasive presence in China has made it very well- known in the domestic market, but the Company is virtually unknown outside of China where large Western Internet companies have more exposure. Chinese-oriented: Tencent has limited experience with non-Chinese users and user expectations outside of China. WEAKNESSES Competition: Tencent operates in an increasingly competitive domestic market. The Company faces intense competition in all fields which may impact demand for its services and thereby decrease market share and revenues. Omnipresent governmental intervention: The Chinese government heavily regulates access to the Internet as well as content. It can also shut down any company or product it sees as a threat to state security. Content is heavily censored. Focus: As Tencent pursues its wildly diversified investment strategy, it runs the risk of losing focus on its main revenue generating streams. Thus it could slowly slip behind in the notoriously fickle gaming and social networking markets. THREATS
  21. 21. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 21 MATRIX: PEST ANALYSIS + / - China web industry highly regulated - Censorship A significant portion of Tencent’s revenues come from value- added-services and other products and services which rely on large Internet user communities. Any regulation that affects Internet access or usage, such as those relating to online game addiction, operations of Internet cafés, Internet privacy, censorship and other regulations will affect the company, and its services and products. It must be noted that the same government regulations make it extremely difficult for large foreign competitors to establish themselves in China. POLITICAL + / - Dependent on the Chinese economy + Competitive pricing - China’s growth slowing Tencent’s operations and finances are directly linked to the Chinese economy since it derives 94% of its revenues from mainland China. China is the world’s second largest economy and has seen steady growth over the last 25 years. It should be noted that in the wake of the 2008 global economic slowdown, Tencent was unaffected by the downturn of the Chinese economy because its products are very affordable for the average Chinese user. Tencent’s market cap has risen more than two-fold since 2008. ECONOMIC + Increasing Internet penetration rate + / - Stable netizen growth rate + Tech-savvy/connected population The Internet penetration rate in China was estimated to be at 55% in 2015. Chinese netizens are more connected than ever but as the penetration rate keeps going up, the netizen growth rate stabilises. However, this should not hinder growth since as the Internet use penetrates into every aspect of work and life, web usage per user increases further. This brings better business opportunities to well-positioned companies such as Tencent. SOCIAL + / - High rate of technological change + 50% of employees in R&D Tencent appears to be solid despite its participation in an industry that reinvents itself every few years and in which changes happen overnight. With 50% of its staff working in R&D and by fostering a climate of internal competitiveness, Tencent has been able to create products such as WeChat, which has grown to 700 million users in a just a few years. Its ability to create efficient, modern and user friendly products has made it very popular with today’s Chinese netizens. TECHNOLOGICAL DEVELOPMENT
  22. 22. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 22 Q&A 2012 2013 2014 2015 Revenue Net profit 2.0 1.5 1.0 0.5 $billion 1 NOPAT: Net Operation Profit After Tax TENCENT INVESTMENT SHARE 2016 REVENUE 2016 PROFIT TEAM SUPERCELL DAILY PLAYERS MARKET CAP: $10.2bn $8.57 billion 84.3% $2,326 million $964 million 180 people 100 million RAPID RISE Supercell’s revenue and profit have increased sharply in recent years thanks to hit games like “Clash of Clans”. Tencent’s largest-ever acquisition is its purchase of an 84% stake in Supercell, maker of mobile hit game Clash of Clans for an unexpectedly high $8.6bn valuation. Tencent’s confidence in Supercell could produce a victory. Such a large transaction would be a first for Tencent, but the European games-maker could pay off if Supercell can keep pumping out gaming hits. Clash of Clans has become one of the world’s highest grossing games thanks in part to regular updates and user- customisation capabilities. These features are well-aligned with Tencent’s own value- added-service gaming income strategies. Over the summer, Tencent started distributing Clash of Clans through its WeChat platform in China, but only time will tell if the purchase will play in Tencent’s favour. What about the Supercell Studio acquisition by Tencent? "Supercell in China has been very popular, but it has not monetised that popularity” TENCENT CHIEF STRATEGY OFFICER JAMES MITCHELL
  23. 23. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 23 Q&A Replica of the Austrian alpine town Hallstat in Guangdong Province, China Picture by Yu Runze, Sina English […] For a very long time, during which much has changed, China has maintained a delicate balance with the world – a concurrent engagement and disengagement strategy. It has engineered a remarkable ability to absorb new information and to take the best advances from others in order to strengthen the vision of China. This has often meant that material advancement has tended to be a technical rather than a social process. And because social stability has long been the primary objective of the Chinese state, any technical advance has needed to be a carefully controlled and managed procedure. […] As a result of this blasé historical practice of taking from others, an attitude has developed to private intellectual capital that often treats it as public property. As such, there is not the same respect for the ‘ownership of representation’ that is expected in the West. “The origins of China’s copycat culture The Chinese attitude towards intellectual property has long been the bane of Western manufacturers. But it is not born out of disrespect, rather it comes from a long tradition of valuing rote learning over original thought by Austin Williams January, 2014 www.global-briefing.org “ 1 3% of Chinese high school students would like to launch a startup compared to 22% for US Students A common misconception about China’s IT industry is that local companies simply copy Western IT giants without innovating on their own. It is said they attain success with emulated products in a market where foreign rivals are in effect restricted by Internet censorship and government regulations. Growing capital availability, risk aversion1 and consistent market growth does tend to encourage Chinese venture entrepreneurs to choose simplicity first and to copy existing foreign models. But this attitude is far from being due to weak innovation skills, it is a necessary strategy. The ability to strike first and grab market share before other players is key to a proper launch. However, durable success is out of reach unless there are quick and functional innovations to fulfill every specific user expectation. They must satisfy the specificities and quirks of the Chinese market regarding digital services and products. WeChat is the best example of this two-step strategy with its abundance of functionalities and multi-layer revenue business model. Why do Chinese companies copy Western products?
  24. 24. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 24 Q&A WeChat and WhatsApp dominate different markets, but WeChat is a fuller, more lifestyle oriented social media app. It includes more utility functions and social interactions in accordance with Tencent’s fully integrated ecosystem vision. What are the differences between WeChat and WhatsApp? WECHAT WHATSAPP ARPU (Average Revenue per User) ~ $7/user/year ~ $1/user/year Main presence China US and Europe Monthly active users 806 million 1 billion Price Free 0.99 (iOS) 0.99/year (other devices) Social Leisure Entertainment Public 
 Accounts Group 
 Accounts Live Chat
 (Walkie-Talkie) Meet Strangers
 (Shake, Drift Bottle) Group Chat Moment 
 Feeds Live Chat
 (Walkie-Talkie) Group Chat Web ChatText Picture Video CallsVoice ChatLocationVideo Text LocationVideo Event 
 Organisation Newsfeed Translation ShoppingPrice CheckTaxi 
 Reservation GameMusic Calls Picture Web Chat
  25. 25. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 25 Q&A Media & gaming VIPshop Ctrip SouFur 58.com Social media Search engines Location based services Youku Tudou Netease TENCENT USER BAIDU TRAFFIC ALIBABA INDUSTRY CHAIN E-commerce Independent startup Tencent core business area Baidu core business area Alibaba core business area Company / business relationships 1 BAT: Baidu, Alibaba, Tencent Plainly speaking, the three dragons of the Chinese Internet world are at war. Using the fortunes generated by their respective core businesses, they systematically invest to launch missiles at each other, trying to weaken the opponents’ position - in other words, they attempt to steal market share from one another. However, their strategies differ wildly. For example, in 2014 Tencent and Baidu tried to team up with billionaire Wang Jianlin’s Dalian Wanda Group to set up ffan.com. At the time, they explained that the venture could become the world’s largest e-commerce platform. To challenge Alibaba they would help shoppers find goods with the help of Tencent/Baidu technology in Wanda’s brick-and-mortar malls. However, the joint venture collapsed and both Tencent and Baidu exited the venture by August 2016. What are the relationships within the BAT1 ? Tango WeChat WeiboSina UC Web 91 Wireless Sogou Sohu Alipay JD.com Leju Juhuasu Qunar eLong Dianping AutoNavi Baidu Maps China Vision Media CJ Games CorpPPStream Changyou.com iQiyi Snapchat Qyer.com Nuomi Tenpay Qihoo 360
  26. 26. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 -200% -100% 0% 100% 200% -1000 2000 5000 8000 11000 14000 17000 2015201420132012 Revenues Net Profit (loss) Profit margin -200% -100% 0% 100% 200% -1000 2000 5000 8000 11000 14000 17000 2015201420132012 Revenues Operating income Operating margin 26 FINANCIAL STATEMENTS Income Statement ($m) FY2015 FY2014 FY2013 Revenues 16,551.69 12,850.12 9,760.57 Gross Profit 9,852.84 7,824.00 5,274.42 Pretax Income 5,827.51 4,723.31 3,113.88 Net Profit (loss) 4,635.17 3,888.96 2,513.42 EPS Basic Net 0.50 0.42 0.28 EPS Diluted Net 0.49 0.41 0.27 Total Operating Expense 10,014.39 8,599.90 7,018.94 Operating Income 6,537.29 4,250.21 2,741.62 Balance Sheet ($m) FY2015 FY2014 FY2013 Total Current Assets 25,001.87 12,262.25 8,670.28 Total Assets 49,370.09 27,865.82 17,318.45 Total Liabilities 29,722.97 14,496.03 7,876.67 Shareholder Equity 19,647.11 13,369.78 9,441.77 Cash Flow Statement ($m) FY2015 FY2014 FY2013 Cash Flow 4,683.76 6,090.99 2,513.42 Net Cash From Operating Activities 7,310.30 5,325.35 3,936.40 Net Cash From Invesment Activities (10,234.68) (4,621.56) (3,090.14) Net Cash From Financing Activities 2,981.34 2,987.38 275.84 Net Change In Cash And Cash Equivalents 116.65 3,660.55 1,105.46 ($m) Tencent Holdings Limited TENCENT HOLDINGS LIMITED SEHK: 700 IPO on 16 June 2004 on SEHK Founded 11/11/1998 Employees 47,635 Address Tencent Building Zhongqu First Road, Hi-tech Park Nanshan District Shenzen, GNG 518057, China Sector Technology End of fiscal year 31 December Website www.tencent.com 17,000 14,000 11,000 8,000 5,000 2,000 -1,000 17,000 14,000 11,000 8,000 5,000 2,000 -1,000 ($m)
  27. 27. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 27 SHAREHOLDING STRUCTURE, FUNDING ROUNDS AND M&A DEALS DATE AMOUNT / ROUND LEAD INVESTOR # OF INVESTORS May 2001 $32m / Private Equity Naspers 1 April 2000 $220k / Venture — 2 Jan 1999 $200k / Angel — 0 DATE ACQUIRED AMOUNT 14 July 2016 China Music Corp $2.7bn (terms undisclosed) 21 June 2016 Supercell $8.6bn (terms undisclosed) 18 Feb 2015 Miniclip SA Unknown 27 Jan 2015 Cloudary Unknown 26 Jan 2014 Linktech Navi Unknown 1 Mar 2012 Zam Unknown Feb 2011 Riot Games $400m (terms undisclosed) 23 Aug 2010 Comsenz Unknown 20 Apr 2010 Shenzhen Domain Networks Unknown SHAREHOLDERS Nº OF SHARES % HELD The Vanguard Group, Inc. 163.28m 1.73% BlackRock Fund Advisors 101.77m 1.08% Capital Research & Management Co. (World Investors) 99.17m 1.05% T. Rowe Price Associates, Inc. 98.96m 1.05% OppenheimerFunds, Inc. 70.50m 0.75% Capital Research & Management Co. (Global Investors) 68.33m 0.72% JPMorgan Whitefriars (UK) 68.23m 0.72% Norges Bank Investment Management 63.84m 0.67% Schroder Investment Management Ltd. 61.22m 0.65% Fidelity Management & Research Co. 53.37m 0.56% Data as of 30 Oct. 2016 Please note that Ma Huateng holds approximately 9.1% of Tencent’s share capital, and 54.29% of OPCO Tencent Computer and Shiji Kaixuan 8,98% Per cent of shares held by top 10 holders NAME % VALUE Naspers Ltd. 33.30% $86.58bn Ma Hua Teng 8.74% $2.27bn TOP 10 INSTITUTIONAL SHAREHOLDERS FUNDING ROUDS (3): $32.420m SIGNIFICANT SHAREHOLDERS (2): $420k MERGERS & ACQUISITIONS (9)
  28. 28. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 HKD per share 28 STOCK ANALYSIS 2016 70 130 190 230 210 50 2013 2014 2015 Apr Jul OctApr Jul OctApr Jul Oct Apr Jul Equity $21.21bn Debt $12.79bn TOTAL RETURN (%) AS OF 31/08/2016 1-MTH 3-MTH 6-MTH YTD 1-YR 3-YR 5-YR 10-YR 15-YR TCTZF 1.65 1.23 5.67 22.81 43.58 66.86 38.75 47.70 0.00 Internet Content & Information 0.82 1.99 4.31 16.10 9.96 30.23 19.90 22.86 13.85 S&P 500 0.65 1.40 -0.09 4.95 8.24 14.56 10.70 16.51 7.45 RATIOS YTD 2Q 2016 2015 Net profit margin 30.48% 28.30% Operating margin 40.15% 39.50% EBITDA margin - 41.61% Return on average assets 11.05% 12.18% Return on average equity 32.12% 28.80% - 20% 10% 40% 70% TCTZF Internet Content & Information S&P 500 TR USD Oct 90 110 150 170 TRAILING STOCK PERFORMANCE Total return (%) as of 31/08/2016 CAPITAL STRUCTURE KEY STATISTICS & RATIOS 62% 38% TENCENT HOLDINGS LIMITED (SEHK: 700) 1-month 15-year10-year5-year3-year1-yearYTD6-months3-months
  29. 29. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 29 CONCLUSION TENCENT’S NEW NBBJ-DESIGNED HEADQUARTERS, WHICH FEATURE HOLOGRAM-LED TOURS Tencent has now beaten most analyst predictions for profit and revenue in all but one of the past six quarters. From the humble beginning of QQ, Ma demonstrated a combination of excellent vision and execution. WeChat brilliantly illustrated the potential for an integrated bundled offering of platform, mobile portal, mobile wallet and e-commerce host. Neither Alibaba or Baidu have such integrated ecosystem proposals. From its original core value-added services revenue stream and leadership in the online gaming industry, Tencent is now taking on advertising through its media content distribution strategy. It is also providing e-commerce through its acquisition of JD.com. To top it all, the WeChat ecosystem has all it takes to successfully deliver Tencent’s Holy Grail, that is - O2O services (Online to Offline). Internationalisation is definitely in Tencent’s growth action plan, but the Chinese market still offers a large growth potential by itself. Notwithstanding existing market share, Tencent could reap rewards from the battle it is waging against the other BAT dragons. "“Will Tencent join the likes of Amazon, Google, Facebook, and Twitter? […]  They already are in that league. The rest of the world just doesn't know it.” ADITYA RATHNAM, COFOUNDER OF KAMCORD - SAN FRANSISCO
  30. 30. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 30 SOURCES (1/2) PAGE 4 https://www.techinasia.com/talk/wechat-valued-at-83-6-billion-half-of-tencents-market-cap http://www.tencent.com/en-us/content/ir/rp/2015/attachments/201502.pdf http://www.prnewswire.com/news-releases/tencent-announces-2015-fourth-quarter-and-annual- results-300237636.html https://www.statista.com/statistics/267031/facebooks-annual-revenue-by-segment/ https://www.statista.com/statistics/266471/distribution-of-googles-revenues-by-source/ https://www.statista.com/statistics/266206/googles-annual-global-revenue/ PAGE 7 http://fortune.com/2016/09/05/tencent-most-valuable http://www.chinadailyasia.com/business/2016-08/23/content_15483337.html https://www.techinasia.com/china-internet-social-media-ecommerce-stats-2015 PAGE 9 http://www.vertoanalytics.com/mobile-industry-needs-watch-chinas-unique-ecosystem/ Icons: the nounproject - Snpr Cartman PAGE 10 http://www.slideshare.net/plus8star/inside-tencent-presentation PAGE 11 http://chinachannel.co/wechat-weixin-are-not-the-same/ https://www.statista.com/statistics/255778/number-of-active-wechat-messenger-accounts/ https://www.techinasia.com/wechat-blasts-700-million-monthly-active-users-tops-chinas-popular-apps PAGE 12 http://www.emarketer.com/Article/WeChat-More-than-Basic-Messaging-App/1014328 https://www.techinasia.com/5-years-of-wechat http://marketrealist.com/2016/05/facebooks-average-revenue-per-user-trending/ http://a16z.com/2015/08/06/wechat-china-mobile-first/ PAGES 13-14 https://newzoo.com/insights/articles/global-games-market-reaches-99-6-billion-2016-mobile-generating-37/ 1 Note: China online gaming market consists in client games, browser games and mobile games; China’s online gaming revenue includes the total spending of online game players in Chinese mainland and the revenue og China online game enterprises gained from overseas market. Source: The data were calculated based on the financial results published by enterprises and interviews with experts in iResearch’s statistical model. Source: http://www.iresearchchina.com/content/details7_20898.html www.newzoo.com : 2016 Global Games Market Report - An overview report PAGE 15 http://www.bloomberg.com/news/articles/2016-08-17/tencent-profit-beats-estimates-as-mobile-games-lure- spenders PAGE 16 1 The data were calculated based on the financial results of the enterprises and interview with experts in iResearch statistical model. Source: https://www.ft.com/content/df82fc8e-0d36-11e6-9cd4-2be898308be3 2 The data were calculated based on the financial results of the enterprises and interview with experts in iResearch statistical model. Source: http://marketingtochina.com/how-tencent-wants-to-crush-alipay/ http://www.capital.fr/bourse/actualites/baidu-alibaba-tencent-et-xiaomi-ces-incroyables-gafa-chinois-1139115 http://seekingalpha.com/article/3792506-jd-will-win-e-commerce-war-china PAGE 17 1 Source: eMarketer, May 2016 . Note: ages 14+; mobile phone users who have made at least one proximity mobile payment transaction in the past 6 months; includes point-of-sale transaction made using mobile devices as a payment method, excludes transactions made via tablet. http://www.ejinsight.com/20151215-unionpay-finally-answers-alibaba-tencent-mobile-challenge/ http://www.iresearchchina.com/content/details7_24301.html http://www.iresearchchina.com/content/details7_21238.html https://www.chinainternetwatch.com/13915/china-electronic-payment-2015/ https://www.ft.com/content/df82fc8e-0d36-11e6-9cd4-2be898308be3 PAGE 18 http://www.merics.org/en/merics-analysis/merics-reports/a-new-record-year-for-chinese-outbound-investment-in- europe/ http://fortune.com/2016/03/09/investors-venture-capital-china/ http://fortune.com/2015/07/22/tencents-venture-capital-us/ PAGE 22 https://fr.wikipedia.org/wiki/Supercell_(entreprise) http://www.wsj.com/articles/tencent-in-talks-with-softbank-for-majority-stake-in-clash-of-clans-maker- supercell-1463987609 http://blogs.reuters.com/breakingviews/2016/06/10/tencent-can-win-with-a-9-bln-bet-on-supercell/ PAGE 23 1 page 17 from http://techrice.com/wp-content/uploads/2011/07/Innovation-Backgrounder-and-Survey- Summary.pdf http://www.slideshare.net/ZhenFund/chinas-startup-ecosystem/8-Why_so_many_copycats_1 http://www.global-briefing.org/2014/01/the-origins-of-chinas-copycat-culture/ http://chinadigitaltimes.net/2016/08/chinas-tech-trailblazers-innovators/
  31. 31. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 31 SOURCES (2/2) PAGE 24 http://www.smithstreetchina.com/content_multimediaInfoShow/class_112/WeChat-WahtsApp.html PAGE 25 https://www.bloomberg.com/news/articles/2016-08-03/baidu-tencent-retreat-from-3-billion-tie-up-with-chinese- mogul www.smithstreetchina.com/content_multimediaInfoShow/Battle-Between-Alibaba-Tencent-And-Baidu-to-Conquer- the-Virtual-World.html PAGES 26-28 Financial Times, Morningstar, Google finance, Yahoo finance, Amigobulls, Nasdaq, Crunchbase, 4-traders.com, CNN and Reuters PAGES 29 Picture: http://aasarchitecture.com/2014/01/tencent-corporate-headquarters-by-nbbj.html/tencent-corporate- headquarters-by-nbbj-04 OVERALL COMPANY REVIEW https://www.chinainternetwatch.com/whitepaper/tencent-empire/ c https://hbr.org/2014/04/why-facebook-should-worry-about-tencent http://www.intel.com/content/dam/www/public/us/en/documents/case-studies/tencent-idf-2015-case- study.pdf http://kraneshares.com/resources/2015_01_bat_overview.pdf The content of this document has been researched and put together with the highest degree of care and attention to detail. However, the possibility of errors in the processing of source acknowledgement and copyrights for external use cannot be fully excluded. Please send any remarks or corrections to contact@fredbonelli.com
  32. 32. TENCENT COMPANY REVIEW OLMA NEXT LTD DECEMBER 2016 Subscribe to OLMA Next’s free newsletter to get access to Case Study Nº3 32 CONTACT DETAILS All data and information provided on this document is for informational purposes only. Frédéric Bonelli makes no representations as to accuracy, completeness, currentness, suitability or validity of any information in this document and will not be liable for any errors, omissions, delays or any losses, injuries and/or damages arising from its display or use. All information is provided on an as-is basis. contact@fredbonelli.com +336 86 86 90 55 FREDERIC BONELLI Researcher www.olmafund.com

×