When Tencent decided to list on the Hong Kong stock exchange almost a decade ago, the choice was viewed as something of a consolation prize. After all, any internet firm worth its salt wanted a ticker on Nasdaq, right? Valuations for tech firms were generally more favourable in the US and Tencent was soon trading at a discount to its Nasdaq peers. Other Chinese internet giants like Baidu, Sina and Sohu all listed on Nasdaq.
But a decade on, and Tencent can look back with pride. Already China’s largest internet company by market valuation, it recently reached another milestone: a market capitalisation above $100 billion. Its shares, trading around HK$500 as of this Wednesday, have jumped over 130 times from its IPO price and only three other internet firms now surpass its worth (Google, Amazon and Facebook).
In fact, a study from the Boston Consulting Group found that Tencent had the highest shareholder total return (share-price appreciation plus dividends) of any large firm globally from 2008 to 2012 – beating Amazon and Apple.
Is the high valuation justified? Legal Evening News thinks so, pointing out that Tencent has bigger revenues and profits than Facebook. In the first three quarters of last year, it enjoyed revenues of $7 billion and net income of $1.9 billion, whereas the US social networking giant reported revenues of $5.3 billion and net income of $977 million.
Compared with other Chinese internet stocks, Tencent’s valuation seems reasonable too. Sina, the operator of Weibo, has a price-to-earnings ratio of 91, much higher than Tencent’s 47 times. Anti-virus software company Qihoo 360 almost doubled its share price last year and accordingly has a price-to-earnings multiple of 62 times.
But Ma Huateng, the company’s chief executive, seems a little queasy about the price, warning that Tencent stock is “scarily high”. (It began 2013 at HK$249.) Even though WeChat, its mobile messaging application and the great hope for Tencent investors, is hugely popular (it boasted 272 million active users as of the third quarter of last year), it is still unclear whether WeChat can make much money. The company doesn’t give revenue figures but Tencent has been trying to monetise the chat service as a platform to sell its online games.
Others disagree, saying Tencent is good value even if WeChat doesn’t deliver financially. “The market doesn’t expect WeChat to contribute too much. As long as Tencent’s profitability continues to go upward, investors are pretty content,” says securities analyst Lu Mingxiong.
As WiC has noted in the past, Tencent derives the majority of its revenue from online games. Data from Analysys International showed that it had a leading 49.2% share of the online games market in the third quarter. NetEase was its closest competitor, with 16.3%.
Tencent’s percentage could rise further, after it became a majority holder of Riot Games, a gaming company it invested in back in 2011. The main appeal is Riot’s hugely popular League of Legends game, which is free to play but hooks in players to spend real cash on acquiring new gaming characters, as well as bits of virtual kit to further their online adventures.
League of Legends already boasts a presence in the US and Europe. But thanks to Tencent, Riot Games is growing usage in China too, taking subscribers from perennial favourite World of Warcraft, which lost 1.3 million subscribers (primarily in China) in a single quarter.
Meanwhile, with Tencent’s share price riding high, the company now wants to spend some of its $5 billion cashpile on its headquarters. The Wall Street Journal reported this week that Tencent has commissioned architects NBBJ to design a new 270,000 square-metre office space in Shenzhen. With two towers connected by two large skybridges, the office is designed to be a “vertical campus,” says the firm.
Investors sometimes grow wary when companies opt for grand new surroundings. But Tencent wants to make a statement about its international pretensions.
“Tencent has global aspirations… So they were interested in something very unique,” said Scott Wyatt, a managing partner at NBBJ. “They wanted something unlike anyone had seen.”
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