Board a subway train in Hong Kong or Shanghai and chances are you will find yourself surrounded by people furiously tapping away on smartphone services provided by Shenzen-based Tencent, China’s largest internet company.
This is by no means solely an underground phenomenon. Step up to street level and your progress will almost certainly be checked by gaggles of feet-dragging, headphone-wearing, teenage girls staring fixedly at WeChat on their mobile devices, through which they are ‘talking’ to any one of the other 200 million or so people doing exactly the same thing.
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| Pony Ma has become a cult figure for China’s aspiring internet entrepreneurs |
Since being founded in 1998 by Ma Huateng, or Pony Ma, as he is widely known, Tencent has become the third-largest internet company in the world behind Google and Amazon, with a market valuation of more than $100 billion – bigger than Twitter and Yahoo combined. At the time there were an estimated 4 million internet users in China. Now that number is close to 600 million. The hype surrounding the potential initial public offering of Tencent’s leading Chinese rival, Alibaba, has reached fever pitch, but Tencent has been public for nine years, underlining its standing as a trend setter for the industry. When it listed, its stock offering was almost 160 times oversubscribed and it was the first internet company based in mainland China to secure a listing in Hong Kong. It raised $200 million.
As Tencent has grown as a public company, so has the reputation of Ma, who now serves as the company’s chairman and chief executive. He is one of China’s richest individuals – occupying fifth spot in the most recent Forbes rich list for the country. Before founding Tencent, he was in charge of research and development at China Motion Telecom Development.
Tencent is a grown-up internet company that has managed to retain the entrepreneurial spirit that is often central to success in technology, while also conducting its business with a degree of transparency that is atypical of its peer group. It is this achievement in corporate governance that is recognized in this year’s Euromoney Best managed companies in Asia survey.
The company’s mission today, it says, is to provide users with a range of what it calls “one-stop online lifestyle services”.
Tencent says that at the core of its strategy is a desire to use technology to enrich the lives of internet users. “Every day, hundreds of millions of people communicate, share experiences, consume information, seek entertainment and shop online through our integrated platforms,” the company tells Euromoney by email.
Tencent’s services span a wide variety of online areas. They include the QQ and Weixin platforms, which alongside WeChat enable subscribers to keep in touch with other users through online chat, instant messaging, video calls and other messaging systems: Qzone for social networking, the QQ game platform for online games, QQ.com for information, and an e-commerce open platform.
The impact of QQ, in particular, is often underestimated, particularly in the west, where it is relatively unknown. QQ has been the main platform through which people in China – particular the younger generation – come together and share their experiences. As the founder of this platform, Ma has become something of a cult figure among the nation’s aspiring internet entrepreneurs.
To accomplish its mission, Tencent has focused primarily on organic growth. “We have built a diversified and proven business model, where we generate stable revenue growth through social networks, online games, advertising and e-commerce, leveraging social leadership and platform strength,” says Tencent.
The company also stresses the benefits of having gone public: “Listing is one of the key ways of funding to support our long-term growth through investing in innovation and technology.”
Tencent says that strong corporate governance and ethical business practices are important. “We view effective corporate governance practices as a priority, with the aim of providing our investors a thorough understanding of our management and how the different businesses are managed,” it says. “Our belief is that investors will recognize significant long-term value when our businesses are conducted in an open and responsible manner.”
The company adds that ethical business practices go hand in hand with strong corporate governance: “We believe that running our businesses in an ethical manner will create trust with the public and ultimately create value for investors.”
Asked about the key to its successes so far, the company highlights, alongside good corporate governance, the presence of a visionary management team, an entrepreneurial spirit and agility in capturing opportunities from the evolving internet industry.
Analysts at Citi recently reiterated their buy rating on Tencent as the top China mobile and social play. In a report, Citi pointed out that the third quarter of 2013 showed continued signs of good strategic and operating progress. “Headline earnings paid the price for the company’s scaling of WeChat globally in what we believe to be a NPV enhancing investment,” the report says. “We also believe that by far the key driver for the company will be its market-leading position in the currently early stage mobile games space. This leadership should dominate results through 2014 and be the ‘delta’ that drives the company to beat forecasts next year and create substantial incremental value in the longer term, leveraging its mobile social dominance in China and, ultimately, internationally. Tencent continues to be our top China web conviction.”
Recently Tencent paid $448 million for a 36.5% stake in Sohu.com, China’s third-largest search engine, in an effort to expand its web offering in the world’s largest online market. Tencent bought the stake in the search unit of Sogou with an option to increase the investment to 40%, according to a joint statement by the companies. Joining forces should help both companies better compete against market leader Baidu in search and mobile internet.
Analysts at UBS say Tencent’s investment in Sogou is strategic rather than one with an immediate impact on financials: “It brings Tencent ‘closer’ to Sogou’s key asset which, in our view, is its Pinyin input software, which penetrates a majority of PCs and an increasing number of smart devices in China.”
“Strategically, we believe that dominating the device desktop with assets like this becomes increasingly important in a mobile world where the browser becomes less important versus the apps ecosystem. The move is also defensive, blocking a potential Sogou takeout by a third party (for example Qihoo). We reiterate our bull stance on Tencent stock, while accepting that this, while a positive step, is not a game-changer. Tencent remains our top China Web pick.”
Analysts at Barclays say Tencent will be the biggest winner and beneficiary in mobile games in China. “Post the initial success of WeChat games, we believe further catalysts are likely to come from a broader range of new game titles that include third-party games, gradual ramp of WeChat payment penetration as well as potential game monetization from overseas markets.”
Barclays adds that Tencent’s integrated platform strategy and resilient revenue streams were reasons to be bullish, also pointing out that the company enjoys a dominant market share in online gaming; open platform growth potential, leveraging the faster growth of the web and mobile games industry; market share gains in the online advertising business, with broad-based solutions via online video and performance-based targeted ads; and growth potential in its mobile payment and e-commerce platforms.
In spite of Tencent’s status as a publicly traded company, some bankers point out that it has so far enjoyed a lower profile than Alibaba, primarily because Ma is a very different character to extrovert Alibaba founder Jack Ma (no relation).
The latter recently demonstrated his flair for publicity by taking a selfie with visiting UK prime minister David Cameron. He is an outspoken, extrovert chief executive who frequently courts controversy. Meanwhile the Tencent chief executive’s main nod to celebrity seems to be his nickname and a tendency to pose for a few too many photos with furry toy versions of the firm’s mascot – a penguin. That is not to say that Pony Ma will not play the publicity game at all and he recently seems to have been making an effort to make more public announcements and appearances.
This is perhaps in recognition of the importance of personality for founders or senior executives in the internet and technology sector – most aptly demonstrated by the late Steve Jobs of Apple, who became inextricably linked with his firm’s products.
An article in the South China Morning Post recently argued that Tencent was set to become China’s mobile-gaming juggernaut and it seems clear that much of its future expansion will come on the back of gaming. Indeed late last year the company reported approximately 570 million users for its initial batch of smartphone-based games.
This will not be its only source of expansion. The company recently set up e-commerce and internet finance companies in China’s Qianhai economic zone in Shenzhen, Tencent’s home city. This puts it in a position to sample the potential benefits, alongside Alibaba and Baidu, among others, of China’s latest testing ground for more liberal financial policies. The company will invest at least $1.6 billion in Qianhai, which was created in 2010 to test freer renminbi usage and capital-account convertibility.
The role Tencent and companies like it end up playing in the development of Chinese society will be a key factor in shaping how the country looks in 20 years’ time. With transparency at the heart of its mission as well as a key part of the way it does business, it is a role Tencent’s management takes seriously. “Our mission is to become the most respected internet company,” it says.
