Tencent on a Tear

Tencent’s just-released half-year report confirms that the company is on a spectacular development path, fuelled by very profitable mobile game sales. Net profit rose 58 percent year-on-year from RMB7.8 billion to 12.3 billion with revenue growing 37 percent from RMB27.9 billion to RMB38.1 billion.

The report confirms existing trends and hints at the beginning of diversification of its subsidiary WeChat revenues through advertising, according to Thomas Graziani, co-founder of WalktheChat, who prepared an analysis of Tencent on which this report is based.

It also indicates that Tencent is in rude financial health, with WeChat bringing in profit only three years after its launch, considerably faster than the speed at which most other (mostly Western) social networks monetized and is a very positive indicator for Tencent’s future.

Tencent is aggressively expanding in mobile games, for instance by investing $500M in a South Korean mobile gaming company. Revenues from e-commerce actually decreased (40 percent annually following the shift of traffic from Tencent platform to Jingdong (Tencent bought 15 percent of Jingdong in March).

Revenue from advertising grew by 59 percent annually (although most of this revenue is coming from cooperation with major brands or institutions such as the FIFA for World Cup. It is not clear at this stage what revenue is from its new public accounts ad feature.

However, ad revenue still only represents a mere 10 percent of Tencent’s revenue. Although the number is growing, Tencent is still positioned as a service company, making money mostly from games and services (80 percent of revenue) rather than through pushing ads to the users.

WeChat Monthly Active Users (MAU) increased from 279 million to 438 million from 30 June 2013 to 30 June 2014, 57 percent growth, confirming WeChat’s position as an outlier in the social media landscape in China. Its closest “competitor,” Weibo, boasts “only” 130 million active users, each spending a lot less time on Weibo than they do on WeChat.

Although the number of users of Tencent’s other subsidiary QQ remained more or less stable (829 million, 1.3 percent growth) the number of people using QQ via a smart device grew rapidly (from 359 million to 521 million, 45 percent growth.

On the long run, however, it is unlikely that the growth of WeChat won’t happen at the expense of QQ. On this topic, Tencent has chosen the same strategy that Apple used to apply to their hardware products: they chose to cannibalize their superstar product before another company would have the time to do so. And they were quite successful at that.

This confirms the story of the growing influence of WeChat with a still firm grasp from QQ, especially in rural areas. This picture is especially enticing for Tencent as WeChat users are likely to turn out to be even more profitable than QQ users. They have higher income, and interact with a much broader range of services than what is available on QQ (the social media, payment and e-commerce features are much more pronounced on WeChat).

Andre Thibaud is a freelance writer involved with Daxue market research China (http://daxuemarketresearch.com/)