From BAT to TPA, why Tencent is one of the most long-term Chinese Internet companies

When Tencent can stabilize its own fundamentals and open the window to invest in the Internet industry, we might as well be indifferent to the unexpected and plan for the next era of China's Internet in the long run.

Tencent (0700. HK), the end of 2023 is quite dramatic, on December 22, a "Measures for the Administration of Online Games (Draft for Solicitation of Comments)" shook the game industry, Tencent's share price fell 12% on the same day, and its market value evaporated by more than HK$360 billion.

Looking back at 2023 for Tencent and even large Internet companies, it is not difficult to find that Tencent is not the most aggressive company in the AI wave, nor is it the company most involved in the sinking and entanglement of the industry, which means that it does not seem to have mastered the traffic code needed to tell the story in the stock market in 2023, and at the same time, it has not deliberately catered to the explosive growth that investors expect. However, comparing the performance of Hong Kong stocks in 2023, it can also be seen that Tencent is actually one of the Internet stocks that will be relatively down in 2023.

Source: Wind, Futu|Watchmaking: Barron's Chinese edition

In fact, the more bland it is, the more it seems that Tencent is not bland.

In the longer term, Tencent has been China's most valuable internet company for most of the time. Its main business structure is more fragmented than most of the above-mentioned Internet giants, and it does not rely too much on a single product or service, on the contrary, it also has sufficient ability to dabble in a variety of topics on the B-end and C-side, so as not to fall behind in the ever-changing Internet industry.

So, even if 2023 ends with a little bumpy end, Tencent is still one of the most worthwhile Chinese internet companies to hold for a long time. Investors may have also realized this after the panic settled, and after the opening of Hong Kong stocks during the Christmas holiday on December 27, Tencent's share price has rebounded by nearly 7% in two trading days, and has returned to around HK$300 in early 2024.

The picture comes from the Internet

BAT era

After the opening of the Internet industry in 2000, China's Internet industry has gradually formed a well-known "BAT" pattern in the past ten years. However, after Alibaba's return to the secondary market in 2014, the landscape looked more like a battle between Alibaba and Tencent:

By the end of 2014, the market value gap between Alibaba, Tencent and Baidu was about double, and in terms of net profit, Tencent and Alibaba were both about 10 billion yuan higher than Baidu.

A year later, Tencent narrowed the market value gap with Alibaba, leaving Baidu far behind, and although Baidu was better in terms of net profit performance, the gap between the three companies was not significant.

In 2016, Tencent's market value surpassed that of Alibaba and remained until 2019, and the ranking of net profit was also chased by these two companies.

As of the last trading day of the year; unit: RMB 100 million|Source: Wind; Graphics: Barron's Chinese edition

On the one hand, the growth of market capitalization is based on the certainty conveyed by past performance. During this period, Tencent's revenue growth rate has been maintained at more than 30% year-on-year, and the year-on-year growth rate of net profit has exceeded 70% at its peak.

Unit: RMB 100 million;%|Source: Wind;Graphics: Barron's Chinese edition

More importantly, based on certainty, users and investors, from everyone to the present, have positive expectations for the future of Tencent and China's Internet – which is far more vivid than the cold earnings results.

In 2003, when you were spending your free time on QQ Games, you probably didn't expect Tencent to become the world's highest-grossing game developer and operator 10 years later.

In 2011, you registered a WeChat account in addition to QQ, which you have long been Xi to logging in every day, and the latter exceeded 100 million users in just one year and two months.

Also in 2011, your computer can finally be compatible with QQ and 360 software, the To C battle ended in a high profile, but Tencent Open Cloud was quietly launched, taking the steps of To B entrepreneurship.

In 2014 and 2015, you watched the Spring Festival Gala while sending WeChat red envelopes, which eventually made Tencent Mobile Pay's monthly active accounts and average daily transactions exceed 600 million by the end of 2016.

In the BAT era, Tencent has slowly created its own basic market in China's Internet industry in a subtle way.

Post-BAT era

Entering 2019, the melee of Chinese Internet companies is comparable to the trend of the Spring and Autumn Period and the Warring States Period, and different people have different definitions of this stage. However, there are still some commonalities that can be extracted to get a glimpse of the industry pattern during this period:

Tencent and Alibaba, as always, occupy the top two positions in terms of market capitalization and net profit. And no matter who comes to the third place, the gap between it and Tencent and Alibaba is not easy to narrow;

As a result, "Who's the third?" has become a hot topic among investors and observers. If you take revenue as a reference system, then JD.com has been stronger than Tencent and Alibaba since 2013;If you talk about net profit, NetEase and Pinduoduo, which came later, can also compete with JD.com for the third place;If you look at the market capitalization, then the iron triangle of "ATM" from 2019 to 2022 can be called stable.

And more importantly, from the ordinate axis of the chart below, it can be seen that the overall market value of China's Internet industry has reached its peak, and then shrank to the level of the BAT era.

As of the last trading day of the year; unit: RMB 100 million|Source: Wind; Graphics: Barron's Chinese edition

There are many reasons for the shrinking market value, such as the tightening of the supervision of the Internet industry, the overall downturn in the Hong Kong stock market, and the external negative impact brought by the "black swan" of the epidemic. If we only discuss performance, we can see that China's Internet companies, led by Tencent, have actually gone through a stage of rapid growth.

Unit: RMB 100 million;%|Source: Wind;Graphics: Barron's Chinese edition

Under the growth rate shown above, Tencent has made more use of the superior resources it has accumulated over the past to supplement its 'connectivity' strategy in different industries in the form of investment for strategic and business needs. As a result, Tencent's investment portfolio peaked at RMB 878.653 billion in 2021, and according to IT Juzi statistics, the number of Tencent outbound investment events was as high as 296 that year.

Source: Company Financial Report, IT Orange; Graphic: Barron's Chinese Edition

Previously, Tencent's investments focused on "social and digital content, O2O in smart retail" and "mobility, fintech, cloud and other industries". On this basis, Tencent put the expression "financial technology" in front of the expression in its 2022 annual report, and increased investment in the two major industries of "healthcare" and "artificial intelligence".

Therefore, in the post-BAT era, investing in Tencent is about the same as investing in China's Internet industry as a whole. This not only includes many giants in subdivided fields that have grown, but also many potential directions and goals that can anchor the future growth of China's Internet.

TAP Times

In 2023, the gears of the times will turn again. Pinduoduo's market capitalization once surpassed Alibaba's, and the combined market capitalization of the two companies is essentially in the same order of magnitude as Tencent.

Admittedly, the "TAP era" is a kind of synonym and a phased overview, and it is difficult for either investors or the media to speculate on the pattern of China's Internet industry in the next decade based on the results of 2023 alone. But behind Pinduoduo's move forward and turning BAT into TAP, does it indicate that Chinese Internet companies can find new growth poles?

If the answer is yes, then it means that there are still companies that can create a new landscape. For such a company, Tencent in the BAT era can be regarded as a perfect model.

If the answer is not so certain, then as mentioned earlier, based on Tencent's layout in many tracks, it is also a target that cannot be missed.

And in addition to the obvious challengers seen in the secondary market, there is also a potential player "B" in the TAP era - ByteDance. According to media reports, ByteDance's revenue in 2022 will be US$85.2 billion (about 605.6 billion yuan), and its operating profit will exceed US$20 billion (about 142.1 billion yuan). If this data is true, then ByteDance's annual revenue in 2022 will surpass Tencent to rank third, and if it is not strictly compared to the net profit of other listed companies with its operating profits, ByteDance will rank second, second only to Tencent.

*ByteDance is calculated based on the revenue and profit reported by the media; unit: RMB 100 million|Source: Wind, media reports; Graphics: Barron's Chinese edition

Further news pointed out that ByteDance's revenue in the first half of 2023 will be about 54 billion US dollars (about 383.8 billion yuan), and the annual revenue is expected to reach 110 billion US dollars (about 781.8 billion yuan). Tencent's financial report shows that the company's revenue in the first half of 2023 and the first nine months of 2023 will be 299.194 billion yuan and 453.819 billion yuan, respectively. From this point of view, the "TAP era" may really be a temporary term.

As of press time, ByteDance did not respond to Barron's Chinese requests for comment on the veracity of the results.

After a frustrating Christmas holiday, Tencent regained its momentum and gradually bridged the terrifying state of the diving black line. In addition, the small shock of that day was also a good thing for Tencent itself, because after 2022, Tencent will also repurchase its own shares throughout 2023. A year ago, Tencent executives bluntly said that "Tencent's share price is undervalued, and our portfolio is also undervalued", which has actually described the idea of investing in Tencent and China's Internet industry.

Starting from 2022, Tencent's repurchase will gradually increase from 200 million or 300 million per day during the repurchase period to about 400 million per day during the repurchase period in 2023.

Therefore, when Tencent can stabilize its own fundamentals and open the window to invest in the Internet industry, we might as well be indifferent to the unexpected and plan for the next era of China's Internet in the long run.

Text | Barron's Chinese contributor Lin Yidan

Edit | Peng Ren

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