INTERNET: Tencent Takes China’s Corporate Crown on Facebook-Sky Hopes

Bottom line: Tencent’s new crown as Asia’s most valuable company reflects the rapid growth of China’s private sector in the last decade, and could auger an eventual challenge to global social networking leader Facebook. 

Tencent takes crown for most valuable Chinese company

Media are fawning on Chinese Internet sensation Tencent (HKEx: 700), which has just edged past telecoms giant China Mobile (HKEx: 941; NYSE: CHL) to become the nation’s most valuable publicly traded company. Such a feat would have been unthinkable a decade ago, when the nation’s private sector was still in its infancy and state-run monoliths like China Mobile still dominated China’s corporate landscape. But much has changed over the last 10 years, and Tencent in many ways reflects the huge potential that investors see in a Chinese private sector that has come to dominate many emerging industries like Internet-based products and services.

I’ve previously written that Tencent is my favorite among China’s “Big 3” Internet companies, which also include e-commerce leader Alibaba (NYSE: BABA) and online search leader Baidu (Nasdaq: BIDU). (previous post) That’s because Tencent, whose focus is mostly on social networking (SNS), develops hugely popular products and services, and maintains a low-profile style that has helped it avoid controversies that often get Chinese firms in trouble.

Alibaba and Baidu are far more typical of China’s Internet, and their controversial practices have landed them at the center of major scandals over the last 2 years. In Alibaba’s case the string of scandals have centered on trafficking in pirated goods over its online marketplaces. Meantime, Baidu landed at the center of a major scandal earlier this year stemming from misleading practices for its online search results.

Both scandals sparked huge sell-offs for Alibaba and Baidu shares, wiping off billions of dollars in valuation as investors became more aware of the risks associated with each company. By comparison, Tencent has managed to remain relatively controversy-free due to its lower-profile style and perhaps a more professional management team led by the low-key Pony Ma, Tencent’s co-founder and an Internet junkie.

That low-key style that focuses on substance over self-promotion has propelled Tencent to China’s most valuable public company, with a valuation of nearly HK$2 trillion, or about $257 billion, after a 4 percent gain in the latest trading session in Hong Kong. That figure is just slightly higher than China Mobile’s, the nation’s leading wireless carrier that has nearly two-thirds of the highly protected Chinese mobile market. (English article; Chinese article)

Some media reports are pointing out that Tencent is not only China’s most valuable company, but also the most valuable for all of Asia. Others are saying the company, operator of the hugely popular WeChat and QQ instant messaging services, is now among the world’s 10 most valuable publicly traded companies.

Banking on Services

In a somewhat unusual twist, none of the “Big 3” Chinese Internet companies are members of the latest edition of the Fortune 500. Instead, Alibaba e-commmerce rival (Nasdaq: JD) recently won the distinction of becoming China’s first Internet company to enter the Fortune 500, largely due to technical issues that give the company bigger revenue than the much larger Tencent, Baidu or Alibaba. (previous post)

I raise that particular issue because it shows how China’s 3 leading Internet companies, and Tencent in particular, have risen to prominence by building empires that deliver high-margin services with very low costs. In Tencent’s case, its biggest breadwinner is online games tied to its SNS platforms that boast hundreds of millions of users. Those same platforms are also showing strong potential for generating similar big returns from advertising, e-commerce and other services.

In many ways some might liken Tencent to global social networking giant Facebook (Nasdaq: FB), and that comparison is most obvious in the 2 companies’ price-to-earnings (PE) ratios. Both Facebook and Tencent currently trade at hefty PE ratios of about 60. That compares with 35 and 13 for Alibaba and Baidu, respectively, the latter still suffering from its scandal earlier this year. It’s also about twice as much as the PE of 30 for global Internet titan Google (Nasdaq: GOOG), also known these days as Alphabet.

The comparisons between Tencent and Facebook certainly look reasonable, even tough the former’s actual valuation is still about 30 percent lower than the latter’s latest market value of $363 billion. There is one other notable difference between the pair, namely Tencent’s inability so far to expand beyond its protected and tightly controlled home Internet market.

Tencent has made a few attempts to travel abroad, including an expensive foray into the US 2 years ago. But most of those have failed, partly due to inexperience and perhaps also because of distrust by local consumers due to its Chinese background. Despite all that, I stand by my earlier assertion that Tencent is China’s most dynamic Internet company, and expect it will continue trying until it finds a successful formula for taking its social networking skills abroad.

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