Showing everyone the money
Tencent so far hasn’t figured out a way to monetize WeChat and that is the long-term underlying issue. Even Microsoft advertises on free installs of Skype. But fundamentally, TENCENT HOLDINGS ADR (OTCMKTS:TCEHY) is in great shape as its recent earnings report shows quite clearly, and I’m sure the firm is looking for ways to integrate WeChat into the rest of its product portfolio.
Q1 results were impressive on the strength of its online gaming portfolio, which includes the massively popular League of Legends. Net profit rose 36.9% year-over-year to ¥4.04billion ($658 million) and revenue was up accordingly — approximately 40% — to ¥13.55 billion ($2.2 billion). More importantly, WeChat now boasts 194 million active users, up from 157.9 million at the end of 2012 which is an annualized growth rate of 91.2%. No wonder everyone is worried.
Of course, there is the real possibility that Tencent could be forced to pay a fee to China’s powerful telecom sector –essentially China Mobile – to continue WeChat’s development. At that point, the firm would be forced to create a monetization scheme. But with hefty cash reserves that exceed $2 billion, TENCENT HOLDINGS ADR (OTCMKTS:TCEHY) has plenty of time and money to figure out the problems being caused by WeChat’s success, especially with its numerous cash cows. Tencent’s president, Martin Lau, is adamant that WeChat’s users won’t pay any additional fees, so the firm is prepared to ride out any push back from China Mobile and with these growth numbers there is no need for him to break that promise at this point.
How to play
If you are not inclined to by pink sheet ADRs, then there are a bevy of ETF’s that are suitable to gain exposure. TENCENT HOLDINGS ADR (OTCMKTS:TCEHY) is the third largest holding in the GlobalX Social Media Index ETF and the largest holding of Guggenheim China Technology ETF (NYSEMKT: CQQQ). Both are small, with less than $32 million AUM between them. SOCL is up 11.1% on the year, while CQQQ is up 20.7%, mostly due to Tencent and its 9.1% weighting. Meanwhile, the biggest Chinese ETF, the $6.5 billion FTSE China 25 Index Fund (NYSEMKT:FXI) has been recently restructured and now includes Tencent as its fifth largest holding with a weighting of 5.67% and investors there should be cheering this addition.
I have been a fan of this company for more than a year now and think it is well positioned in both the gaming – with the acquisition of Riot and Epic Games. Now with a strong social networking presence Tencent may just be the best consumer-related stock in Asia for the foreseeable future. WeChat is still in its infancy and its game and game asset portfolio — it owns the Unreal gaming engine — place it in a great growth position across a number of potential gaming platforms, including mobile.
Peter Pham has no position in any stocks mentioned. The Motley Fool recommends SINA . The Motley Fool owns shares of China Mobile and Microsoft.
The article The Good Problems WeChat is Causing Tencent originally appeared on Fool.com.
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