While largely unknown outside China, Tencent Holdings has quietly became the largest Asian company by market capitalization and in April broke into top 10 largest companies in the world. Most recently it was already valued at $341.5 billion.
Best known for its messaging app Wechat (Weixin), the number 1 social network and messaging app in China, it is also the biggest gaming company in the world by revenue and one of the most prolific venture capital investors in the world. Through its Wechat ecosystem it is uniquely positioned to capitalize on the fastest growing industries such as mobile payments, online lending, mobile advertising and mobile gaming. Through my article I am going to present 5 reasons why I believe Tencent will be the world's biggest company in the world by 2025.
Fintech in China is not just a buzzword, it is already booming
1. Mobile payments
Mobile payments market in China reached 5,5 trillion $ in 2016, more than 50 times the size of the US market. While international media likes to focus on Apple pay and Android pay, they are miniscule compared to the Chinese giants such as Wechat Pay and Alipay. 425 million Chinese use their mobile phones as their wallets, a staggering 65% of all mobile users, while 5 years ago this market didn't yet exist. 44,5% of mobile payment users said they no longer take cash with them when leaving their home.
Cashless society
Tencent's Wechat Pay has almost caught up with Alipay and had 38,1% market share in Q4 of 2016, up from 16% in Q4 of 2015 and according to one analyst in 2017 "the market share of WeChat payment is now on par with Alipay's.". There is no reason to believe this growth will stop, and it is probably reasonable to assume Wechat pay will soon taken over the first spot from Alipay. Tencent's Other services revenues, which include mobile payments and cloud services more than tripled YOY in Q4 2016.
JP Morgan estimates online payment providers can grow their revenue by 42% annually to 29,3 billion $ in 2020
"The world’s most valuable resource is no longer oil, but data"
The Economist
Armed with data about their 937 million Wechat and 860 million QQ users, Tencent knows not only which celebrities and brands they follow, with whom they chat and what they read (like Facebook), it also knows what they bought offline and online with Wechat Pay. Through their other investments in ride hailing company Didi, bike sharing company Mobike, food ordering unicorn Ele.me, and countless of others, it also probably knows where you go and what you eat. Tencent is not only trying to connect offline services to its Wechat Pay platform, it is also trying to create one of the world's most accurate databases about consumers. Lack of privacy laws and users who don't really care about privacy online (unlike in US and Europe) makes China an ideal ground for monetization of big data.
2. Online lending
Apart from mobile payments, China is the leader in online lending and investing. Wechat users invested more than 100 billion Yuan, around 15 billion $ into a money market fund through Wechat app. Tencent's Webank, first private online bank in China, is offering loans of up to 200,000$ to consumers without traditional credit checks and waiting, through, you guessed it, Wechat.
Tencent can draw from the data they collect to create accurate consumers' credit scores and offer them loans in a country where a lot of the population, especially in the rural parts, is still underbanked. Big Chinese state owned banks often overlook small consumers and rather lend money to big, state owned enterprises, which again, makes Tencent (and Alibaba) uniquely positioned to tap this market.
JP Morgan estimates the online consumer loan market can grow to 95 billion $ in 2020, allowing the originators to generate 11,3 billion $ in total sales.
"Alibaba Group and Tencent Holdings will jointly capture 50-60% of the overall fintech market, adding on another $326 >billion to $391 billion to their current market cap, assuming the pair is trading at 25 times 2020 earnings. If investors include >their fintech growth potential, Alibaba and Tencent's shares have another 65% to 78% upside to their current prices."
JP Morgan
In March, when JP Morgan wrote their analysis, Tencent was worth around 262 billion $. If we add the median upside of 71,5%, JP Morgan believes the company will be worth 450 billion $ in 2020.
As of July 1st, Tencent is already worth 341.5 billion $.
3. Mobile advertising
Tencent's overall advertising growth last year was second only to Facebook (includes all their apps and services, mobile + desktop). Source: Bloomberg
As in the west, user data can also be used for advertising. While Facebook perfected targeted advertisements in the last years, Tencent, armed with all the data Facebook has + arguably even more important payments data, has only just begun to tap into this opportunity. It only released its targeted self-service advertising offering (ala Facebook) in 2016 and its 937 million Wechat users and 860 QQ users are still underserved by ads. Wechat users typically see just one ad a day targeted to their demographic in their feed.
Facebook revenue per 1 mobile user = 4,17 $, Wechat =0,84 $
Facebook therefore monetizes each user almost 5 times better than Wechat, which is not surprising considering Tencent only began monetizing Wechat through ads in the last 2 years. If Tencent successfully follows Facebook (it has the data), its mobile advertising have enormous upside potential.
4. Mobile gaming
Chinese mobile gaming market is expected to reach 21,3 billion $ in 2019, up from 11,2 billion $ in 2016, with Tencent taking the lion share of the market. In first half of 2016, Tencent had a 44,7% market share in mobile gaming market inside China and its growth continues strong. In Q4 Tencent's mobile gaming revenue increased 51% YOY.
Source: Newzoo
5. Venture capital investments
Tencent is one of the most active and prolific venture capital investors in the world. It is currently invested into 21 of 193 unicorns in the world (I probably missed some), and is not slowing down. Only in May 2017 they already invested into 7 different companies, the best know being Go-Jek, the Indonesian market leader in ride sharing. Tencent's size gives it the ability to borrow funds cheaply, which they can invest with amazing results. They invested into Snap in 2013, now valued more than 20 billion $, Didi in 2015, now valued at 50 billion $, Lyft in 2015, now valued at 7,5 billion $, and countless of others. Not only they invest abroad, when they invest at home, they can offer the invested company the expertise and the reach of Wechat, such as the case of Mobike and Didi, both of which are now integrated into Wechat Wallet, through which 937 million users can hail Didi and rent a Mobike. Companies that they invest in also integrate Wechat Pay into their apps, further increasing Tencent mobile payments revenues and improving the ecosystem.
All the above reasons makes me believe that Tencent has the potential to become the biggest company in the world by 2025, with only two real competitors in my opinion being Facebook and Amazon.
Let me know your thoughts in the comments.