In one of my favorite movies, “The Silence of the Lambs,” Dr. Lecter helps Clarice Starling catch the killer by stating the famous lines, “No, he covets. That’s his nature. And how to we begin to covet, Clarice… We begin by coveting what we see every day.” This explanation of human behavior can also describe many people’s investing philosophy. They purchase a restaurant chain’s stock because they see a line outside of its locations or a new tech company because they love its new. While this is not a bad investing paradigm, it does exclude many amazing companies that a person just does not see or interact with. One such company is one of the fastest growing, largest technology companies that you probably never heard of, Tencent Holdings.
Tencent was founded by five Chinese Nationals in 1998 as an electronic messaging service for cellphone users in China. In the next decade, Tencent started to produce video games geared toward mobile devices. And in 2011, the company launched its social media app, WeChat, in China. Today the company has grown through acquisitions and internal growth to be one of the largest companies in the world. Its corporate motto is “Connecting People For A Greater Future” and it has its hands in virtually all aspects of people’s lives in China and throughout Asia. It is currently the largest gaming company in the world. Its instant messaging platform, QQ , has over 860 million users. WeChat is used by almost a billion people. Its payment system is used more than cash in China. It also owns a massive movie studio, music entertainment group, the world’s largest e-sports live streaming platform, China’s largest online portal for news and information, and dozens of other businesses.
Today, Tencent has a market capitalization of more than $460 billion. That is bigger than Exxon Mobil, JP Morgan, or Johnson & Johnson. And even at this massive size, the company is still aggressively growing. In its latest quarterly earnings release, Tencent’s profit grew by 17%, beating analyst estimates. And its revenues grew by 16% to $12.4 billion for the quarter. The company saw significant expansion in its mobile banking and finance divisions along with its cloud services businesses. These products saw growth at over 40%.
Going forward, I see even more opportunities for Tencent. Recently, the company’s gaming division has been hampered by the Chinese government decision to temporarily halt the approval of new games as all videogames in China must be approved by the government. Just recently, the government started to approve Tencent’s backlog of games which should give this high margin line of business an immediate boost. In addition, the company is investing heavily in its corporate internet business and cloud services division to challenge market leader Alibaba in this sector just as Microsoft did with Amazon here in the United States. If it gains further traction, this can be a major source of revenue and profit growth.
Of course, Tencent’s growth with be heavily dependent on GDP growth in China and Asia. While the company is not directly exposed to the increased tariffs recently levied on Chinese imports by the U.S. government, if these taxes slow business and consumer spending in China Tencent will clearly be affected. Despite this risk I believe that Tencent is a great company to own. Even though this is a Chinese company, the stock is traded in the US as an ADR with the ticker symbol TCEHY. Or, for the less risk seeking investor, you can buy a fund or ETF that focuses on Chinese companies. These funds will probably have significant holdings in the two largest Chinese companies Alibaba and Tencent. Either way, I believe investors in Tencent and similar fast growing companies in China will continue to reward long-term investors as the country continues to grow and expand its influence across the globe. ¦
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