Thursday, March 22, 2007

Another Solid Year For Tencent (TCEHF.PK or 0700.HK)

Tencent (TCEHF.PK or 0700.HK) announced another solid year of performance yesterday.

Tencent is the largest IM (instant messaging) service provider in China with 580M user accounts. MSN or ICQ is not even a fraction of this number in China, you can look at this chart from Google Trends, it shows the relative frequency of keywords (QQ, ICQ, MSN) search in China, it is a very good indication of their relative popularity among Chinese internet users. We can see from the chart that except in Shanghai where MSN is more popular than QQ ("QQ" is the name of the IM service offered by Tencent), the number of QQ keyword search far exceeded ICQ and MSN in other cities. This is intuitive because there are more foreigners living in Shanghai than in any other Chinese cities, they may be more inclined to using MSN than QQ.

Tencent also provides online game and other internet and mobile value added services in China.

Lets look at some of the important numbers:

Revenue Up 132% YoY
Operating Profit UP 140% YoY

Profitability grows faster than top line! This is a very good sign. A lot of companies sacrifice profit by top line, while Tencent can grow top line by more than 2X with IMPROVED profitability, really impressive !

Online advertising revenue increased by 137% YoY. Majority of such growth was attributed to increased in-game advertising revenue. This is another great thing, in-game ad is believed to be a good new channel of internet ad. EA (ERTS) is also doing the same thing by placing ad to its sports games.

About the Chinese internet development, according to China Internet Network Information Center (CNNIC), Chinese online population has grown by 23.4% in 2006 (vs. 18.1% for 2005). Broadband users growth is at a even higher rate of 41.1% to reach 91M. Country internet penetration rate is 10.5%, versus mobile phone penetration of 40%, still much room to grow!

For those of you who are aware of the new Chinese tax unification policy enacted in the National People Congress meeting concluded last week, coproate tax rate will be standardized to 25% for both local (used to be 33%) and foreign enterprise (used to be 15%) with 5 years grace period, it will have no effect to Tencent (Tencent is a 'foreign' company from tax perspective because it is registered in Hong Kong !!) because it is based in Shenzhen and the Shenzhen government still honour the special 15% tax rate which is eligible for 'strategic high tech' companies located there.

Share price dropped by more than 5% today because of a CITI downgrade from BUY to HOLD saying the share price has already appreciated by 20% since Jan and investor shall look for more attractive entry point.

I don't agree with CITI's report and I see this as a good buying opportunity. I've increased my existing LONG position at HK$26.2 today.

Disclosure of Interest: I am LONG in 0700.HK


Anonymous said...


Anonymous said...


qq o係國內雖然流行..msn 已經慢慢佔番多d市場...特別係用o係企業裡面同事/客戶間溝通...公司server會block左qq個port, 而msn就可以照用....

另外我唔敢肯定會唔會有新網上遊戲同IM o係國內出現...之前國內非常流行的網上"勁舞團"遊戲...就係另一間公司出品..

由於網上競爭激烈, 發展一日千里...
tencent 雖有整佳市場佔有率...但估值不便宜...本人對其股價而盈利發展有保留...

Zhong Siwei 鍾思維 said...

我同意Tencent絕對不是平宜。但其實類似股票的PE 也絕對不是低, 百度Baidu 86, 分眾傳媒Focus Media 48, 新浪SINA 50, Tencent 43。

問題是你怎樣看這個sector 的前景。當然我絕對不會建議投資相對整個投資組合太大部分的金錢在這類股票。對我本人來說,我不會投資超過20%在科技或者互聯網有關的股票。