Tencent, the $500bn Chinese tech firm you may never have heard of

It is China’s web giant and has a string of high-profile investments spanning Snapchat, Spotify, Tesla and Hollywood film and TV. It is a sprawling corporate giant that has recently overtaken Facebook to become the world’s fifth most valuable listed company – but few, in the west at least, will have heard of Tencent, even though it is worth half a trillion dollars and rising.

China is the world’s most populous digital market and the protection afforded by state censorship through the so-called great firewall – which has meant no competition from Facebook, Google, Twitter and Netflix – has helped Tencent flourish since it launched nearly two decades ago in Shenzhen. But in the last year the shares have been supercharged – climbing from less than HK$200 (£18) at the beginning of 2017 to HK$442 now – and the value of the company has soared.

There are three cornerstones of Tencent’s business – its messaging app WeChat; the biggest mobile gaming franchises in the world; and an ecosystem built around its 1 billion users that apes many of the services offered by the Silicon Valley firms that do not operate in China.

The company’s Netflix-style Tencent Video service – the biggest in China with exclusive content including NFL games and HBO series such as Game of Thrones – more than doubled in size in the last year, attracting more than 40 million paying subscribers.

“They have a relationship of mutual benefit with the Chinese state,” says Jamie McEwan, an analyst at Enders. “They have been allowed to grow and massively diversify their businesses without the level of scrutiny or competition you might see in western countries.”

WeChat app icon.

WeChat app icon. Photograph: Reuters File Photo/Reuters

Late last year, Tencent became the first Chinese firm to pass the $500bn stock market valuation mark, supplanting Facebook as the world’s fifth biggest firm, a bittersweet moment for company co-founder Ma Huateng, 46, also known as “Pony” Ma.

In 2014, Tencent had been on the brink of buying What’sApp, which would have made it a global power player overnight. The company was close to a deal when talks had to be delayed so that Ma could undergo back surgery. A panicked Mark Zuckerberg got wind of the move and swooped, tabling an enormous $19bn rival bid – by far Facebook’s biggest deal and more than twice the offer made by Tencent – to see off the threat.

Thwarted but undeterred, late last year Ma took a 12% holding in Snapchat (he had made a small investment in 2013) in a busy year that also included buying 5% of Elon Musk’s electric car firm Tesla and swapping minority stakes in its music streaming business with Spotify.

Tencent Music, which dwarfs efforts by Apple and Spotify in China, is expected to make a $10bn stock market listing this year.

Tencent also cranked up its domination of mobile gaming, handing over $8.6bn for the Finnish company Supercell, maker of two of the biggest games in the world, Clash of Clans and Clash Royale.

Gamers play ‘World of Warcraft’ in Cologne, Germany.

Gamers play ‘World of Warcraft’ in Cologne, Germany. Photograph: Oliver Berg/AFP/Getty Images

It also owns the Los Angeles game-maker Riot, behind the huge League of Legends franchise, and has stakes in Gears of War maker Epic and Activision Blizzard, home to Call of Duty, World of Warcraft and Candy Crush Saga.

Tencent also owns the most profitable game in the world, Honour of Kings, which makes about $1bn a quarter and has 200 million monthly players.

It has proved so addictive in games-mad China that the government warned Tencent in an article in the state-owned People’s Daily last year saying it was “poison” and a “drug” that harms kids.

The risk of a government crackdown on one (or more) of Tencent’s golden geese – the company relies on gaming for more than 40% of total revenues – spurred jittery investors to wipe almost $18bn off its stock market value. Tencent swiftly introduced one-hour time limits for under-12s and two hours for 12- to 18-year-olds.

Analysts estimate that Tencent digital services are used by more than two-thirds of the Chinese population. Chinese users collectively spend 1.7bn hours a day on the company’s apps.

The business started in cramped Shenzhen offices in the late 1990s, swiftly developing a bad reputation for cloning digital products for the Chinese market, but it was the launch of WeChat in 2011 that supercharged the company’s strategy.

The WeChat eco-system is so broad it is almost like rolling most of the apps on a typical western user’s mobile phone into one.

“It is compared to What’s App or Facebook messenger but it is not really,” says Xiaofeng Wang, a Singapore-based analyst with Forrester. “It has payment systems, smart city offerings such as the ability to schedule appointments at a bank, a doctor, pay traffic fines or make visa applications and e-commerce.”

Tencent’s ambition to be an essential part of digital daily life means it holds a dizzyingly diverse range of interests including in Didi, China’s answer to Uber, the nation’s second biggest e-tailer JD.com and Hike, a messaging service popular in India. In December, it even did an Amazon, which has gone real-world buying retailer Whole Foods, taking a stake in one of China’s largest supermarket chains, Yonghui Superstores.

Tencent was a backer of the film Kong: Skull Island.

Tencent was a backer of the film Kong: Skull Island. Photograph: AP

It also has a stake in Hollywood film distributor STX Entertainment, behind movies such as Bad Moms and All The Money in the World, while movie arm Tencent Pictures was a backer of blockbuster Kong: Skull Island.

“The ultimate goal of all their investments is to enhance the services they have already developed, to support the eco-system,” says Ruomeng Wang, senior analyst at IHS Markit.

The protected market conditions that have allowed Tencent to flourish, and the vast differences between Chinese and foreign internet users’ web habits, has seen the company struggle abroad. Seven years after launching WeChat it is yet to break into any other market, although it has earmarked Malaysia.

Analysts believe a key focus will be on targeting the huge numbers of Chinese diaspora and tourists by making WeChat features like payment available overseas, rather than try and make the app a fully-fledged Facebook rival. The payment system is already available in places like Harrods and Selfridges.

“WeChat and Tencent tried aggressively expanding into international markets like South America, Europe and even the US but it didn’t work out so well in mainstream western markets where existing players like What’s App are so established,” says Forrester’s Wang. “Their global expansion will in some places target Chinese travellers, with different strategies in emerging markets like South East Asia.”

Tencent co-founder Ma Huateng aka Pony Ma.

Tencent co-founder Ma Huateng aka Pony Ma. Photograph: ChinaFotoPress/Getty Images

Tencent facts

  • It is ironic that a company worth over $500bn happens to be called Tencent, which translates into English as “soaring information”.
  • Co-founder Ma Huateng, nickname Pony Ma, is the 14th richest person in the world with a fortune of almost $50bn, one place below Google co-founder Sergey Brin.
  • Befitting its status as a global tech giant the company is aping its Silicon Valley rivals with a new $600m twin skyscraper headquarters.
  • Tencent is one of three Chinese internet behemoths, including Baidu and Alibaba, known collectively as BAT. China’s answer to Silicon Valley’s power club known as the FANGs – Facebook, Amazon, Netflix and Google.
  • Each year every Tencent employee, more than half of whom are employed in research and design, is given the chance to participate in a company-wide singing competition and to “shine brightly on stage”.
  • Pony Ma is deputy of the National People’s Congress, China’s legislative branch of government, politically useful in a country renowned for cracking down on businesses that get offside with Beijing.

A record-breaking year – the global economy in 10 charts

World equity markets boom

MSCI index

Global stock markets have roared ahead in 2017, with the MSCI index of bourses in 47 countries up by 22% and almost $9tn (£6.6tn) according to Reuters. This has been fuelled by a boom in growth among developed nations and Donald Trump’s plan to cut US corporate tax rates – which is expected to boost company profits in the world’s largest economy and returns to shareholders. China managed to maintain its rate of expansion, dispelling fears over a potential sharp slowdown as it matures after decades of rapid growth, while the eurozone also staged a recovery after years of uncertainty. In Britain, the FTSE 100, packed with companies that earn much of their profit in foreign currencies, has surged as a result of stronger global growth and the weak pound since the Brexit vote.

Buoyant global trade

Baltic Dry index

The Baltic Dry index is used as a proxy for global growth because it measures dry freight costs for commodities such as coal, rice and wheat. When there is a jump in demand for shipping these products, it signals expansion for the world economy. This year it has risen to its highest levels in four years amid a recovery in global trade. Other barometers for growth, such as surveys of business activity from firms’ purchasing managers, have shown appetite for goods and services in rude health across developed economies in recent months. Still, fears linger over a breakdown in trade from rising protectionism in the US and Europe.

Investors stay relaxed

Vix fear index

Known as Wall Street’s fear gauge, the Chicago Board Options Exchange Volatility Index is a measure of the stock market’s expectations for how much prices might swing by, up or down, over a 30-day period. The higher the index, the more likely it is investors will be in for a wild ride. This year, the barometer fell to its record low of below 9 points. Anything above 20 indicates that things are going awry, and is a common feature of falling markets.

Pound stages Brexit comeback

£ v $ graph

The pound has staged a recovery on global exchanges since the start of the year amid gradual progress in the Brexit negotiations. Although sterling is still about 10% below its level before the EU referendum, the currency has risen by almost 10% this year to stand at about $1.3505. Meanwhile, the dollar has struggled to benefit in 2017 from the Federal Reserve’s interest rate hikes in March, June and December, while the euro has gained ground amid a strengthening eurozone economy and as expectations grow for the European Central Bank to finally start tightening monetary policy by curbing its quantitative easing programme.

Eurozone on the mend

eurozone GDP chart

One of the biggest surprises this year was stability in the eurozone after years of tumult. After the election of Donald Trump, many market watchers expected the next countries to succumb to populist politics would be in the EU – which could have spelled doom for the single currency. Marine Le Pen failed to take power in France, as did anti-Islam, anti-EU populist Geert Wilders in the Netherlands and Alternative für Deutschland in Germany. Meanwhile, amid a more stable political backdrop, growth has roared ahead. Still, accommodative monetary policy that is expected to be gradually withdrawn has helped, with ECB governor Mario Draghi saying the recovery will still heavily rely on stimulus from the central bank for now.

Wage growth remains subdued

target/actual inflation chart

There has been tepid growth in the price of goods around the world, barring the UK, where the pound’s sudden devaluation following the Brexit vote led to surge in imported food and fuel costs. Wage growth in particular was missing in action in 2017, despite low rates of unemployment across most major developed economies. This has left many in the economics profession puzzled, because tight labour markets typically lead to greater levels of bargaining power among workers to demand higher wages. It also poses an additional challenge to central bankers – who would like to see stronger wage inflation before they raise interest rates, normalising the world economy after years of stimulus in the wake of the global financial crisis that started 10 years ago.

Productivity puzzle persists

UK productivity chart

The failure to drive up the productivity of workers has puzzled economists the world over this year, not least in the UK. Although the problem is particularly sharp in Britain, each of the G7 nations has experienced sluggish growth since the crash a decade ago. That’s a worrying sign for wage growth, because greater output per hour worked, or per worker, can help to support higher pay for that output. The culprit could be higher levels of employment, low interest rates, or low levels of investment in productivity boosting projects by governments and businesses. In the UK, weak productivity growth was behind a sharp downgrade to GDP growth alongside Philip Hammond’s budget in November. It’s also one of the key reasons why UK workers aren’t expected to see their wages after inflation go back above pre-crisis levels until the mid 2020s.

Oil bubbles up

oil price chart

The global oil price has recovered sharply in 2017, benefiting from increasing demand from factories around the world, particularly in China, amid a boom in economic activity. After crashing in late 2015 to spook global markets, this year has been one of calm and steady gains. Opec has reined in production to keep a lid on supply, while there have been no major escalations in tensions to drive up the price to unsustainable levels. One warning: US shale oil production may start to come back online at current prices, as the more expensive costs involved with extraction become economical once more. This could boost supply, leading prices to fall.

Bitcoin mania takes hold

bitcoin bubble

Probably the financial story of the year. Even though there are fears of a coming crash, 2017 will go down as the year of the cryptocurrency. Bitcoin’s rise has been meteoric, beginning the year valued at about $1,000 and reaching almost $20,000 by the middle of December. There have been wild swings on the way, with the currency losing more than a quarter of its value in a single day this month, before staging a recovery. Economists think bitcoin has all the telltale signs of a bubble, with worrying parallels to the Tulip mania of the 17th century, when the price of bulbs crashed in spectacular fashion after a buying frenzy.

Chinese debt worries

chinese debt graph

China’s rapidly accumulating debt pile, having quadrupled since the financial crisis, became of increasing concern this year – although has not yet roiled the global markets. The International Monetary Fund warned that Chinese debt is now high versus international norms and that rapid growth may have led to an unwillingness among officials to let struggling firms fail. In September, Standard & Poor’s downgraded its credit rating citing the risks from total debts in, which have quadrupled since the financial crisis. While China has started taking steps to rein in debt without having affected growth so far, economists worry a wrong move by officials could upset the apple cart in the near future.

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