Bottom line: WeChat’s growth will continue to fuel strong revenue gains for Tencent but could also create a drag on profits, while China Mobile’s profits are likely to be flat as savings from slower infrastructure spending are offset by big 4G promotions.
High-tech leaders Tencent (HKEx: 700) and China Mobile (HKEx: 941; NYSE: CHA) are providing a nice contrast with their latest earnings reports, pitting one of China’s most innovative private companies against one of its biggest state-run laggards. The results cast a painful spotlight on China Mobile, China’s largest mobile carrier, whose profits sagged in the fourth quarter as it lost business to more nimble companies like Tencent. Meantime, Tencent’s profits and revenue posted healthy gains, as it provided data to generate excitement about its fast-growing but money-losing WeChat social networking service.
Shares of both companies reacted much as one would expect, continuing recent trends. China Mobile shares dipped 2.1 percent after its results came out, and are down about 15 percent over the last year. Tencent’s results came out after the market closed, but I expect they will rally in the new trading day. Over the last year they are up 5 percent, which is quite impressive when one considers the main Shanghai index is down 19 percent during that time.
Let’s begin with Tencent, which was quite talkative about the growing volume of financial transactions taking place on WeChat, which boasted nearly 700 million active users at the end of last year. (company announcement; Chinese article) The company posted impressive revenue growth of 45 percent in the fourth quarter, with operating profit rising by a similar amount to 10.9 billion yuan ($1.7 billion). That kind of growth is quite impressive for a company of Tencent’s size, and is quite a bit ahead of comparable figures for leading Internet rivals Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU).
Tencent won’t say how much money it’s losing on WeChat, but it did provide some figures that hint at how heavily it is subsidizing the platform. It said that WeChat paid 300 million yuan in fees for financial transactions on WeChat in January, averaging 0.1 percent of the value of each transaction. That would translate to roughly 300 billion yuan in transactions on WeChat for the month, and a whopping 3.6 billion yuan ($500 million) in fees paid by Tencent to its banking partners on an annualized basis.
Tencent last month announced it would start charging a fee for people who transferred money from their WeChat accounts to their bank accounts, in a move that drew loud criticism from consumers and Chinese media. (previous post) The company declined to retract the fees in response to the protest, but the brouhaha did reflect just how difficult it could be for the company to make WeChat a big profit engine.
Next there’s China Mobile, which doesn’t attract much interest these days from anyone except perhaps people who like the company’s relatively large dividend. China Mobile ceased to be a big growth story 2 or 3 years ago, as China’s mobile market reached near-saturation after years of rapid growth.
The company’s latest results show its profit dropped 13 percent in the fourth quarter, based on my own calculations, reversing profit growth of 3.4 percent in the first 3 quarters of the year. On an annual basis, China Mobile’s revenue for the year grew 2 percent, while profit declined slightly. (company announcement; English article; Chinese article) One of the most revealing numbers was China Mobile’s average revenue per user (ARPU), which dropped 5 percent to 56 yuan.
ARPU has been dropping for years, but the fact that it continues to drop so much certainly isn’t a good sign. China Mobile has been competing aggressively with its 2 smaller rivals to sign up subscribers for their newer 4G service, which is one of the main factors pressuring profits and ARPU. I don’t expect that pressure to abate much this year, though China Mobile could get some relief as its infrastructure spending starts to ease and it begins to phase out its underutilized 3G network.