Tencent Q3 16A – Work in progress.
Still a lot of work needed to realise its full potential.
Tencent reported another excellent set of results but the fact that expectations are already so high meant that the numnbers felt more like a damp squib.
Q3 16A revenues / EPS were RMB40.4bn / RMB 1.12 compared to consensus at RMB39.0bn / RMB 1.17 and Edison at RMB35.3bn / RMB 1.15.
The combination of greater investments being made in sales and marketing and a higher tax rate was responsible for the lower profitability that the company experienced.
When one looks at gaming, the importance of the transition that Tencent is going through becomes apparent.
Although Tencent did manage to grow revenues from PC gaming, the daily active user count was down by 9% YoY and the number of concurrently active users for casual PC-based games was down 18% YoY.
This is an indication that usage is shifting to mobile and that PC users are spending more time playing each other rather than on their own against the AI.
Tencent has responded to this by offering more game related activities such as tournaments, video streams of popular gamers and so on.
This shift is also nudging Tencent closer and closer to becoming a fully-fledged ecosystem but in that regard, there is still a lot of work to do.
Its biggest assets here are Weixin / WeChat, its social network Qzone and its mobile gaming offering.
All together Tencent has 77% coverage of the Chinese Digital Life pie but its assets remain quite disparate and fragmented and it is this that needs to change.
Tencent needs to become the place where Chinese users go to spend 77% of their digital lives perhaps with the occasional outing to Alibaba to shop and Baidu to search.
To achieve this, Tencent needs to fully integrate its offering and make it as consistent, easy to use and as fun as possible.
Tencent shows little sign of doing this on the surface but the investments that it is making in data centres and in sales and marketing are some indication of what is taking place behind closed doors.
This is encouraging because on its current trajectory, Tencent is heading for a big slowdown in 2017 and beyond as the Chinese market matures.
However, Edison calculates that Tencent is very far away from fully monetising the ecosystem that it is creating, meaning that there is an opportunity for another leg of growth in the medium-term.
To achieve this, Tencent needs to really integrate all of its assets into a single experience for users rather than a series of different services.
It is at this point that further growth is possible both in terms of profits and the share price.
However, we don’t see Tencent being ready to grab this opportunity in 2017, and so in the short-term a slowdown looks inevitable.
The good news is that even without the ecosystem there is still some headroom in Tencent’s valuation.
Hence, we am happy to keep it on my list alongside Microsoft and Baidu.
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