Access one of Asia's most innovative tech companies | BetaSharesInsights

Tencent should be more than just change in your pocket

BY Justin Arzadon | 3 October 2018
Share
Tencent should be more than just change in your pocket

Ask almost anyone young or old in the western world if they are familiar with Amazon, Google, or Facebook and you would most likely get a resounding “yes!”  However, if I were to ask those same people if they were familiar with Tencent, the answer would probably be “Ten who?”

So, who exactly is Tencent and why haven’t you heard of it?

Tencent is a Chinese digital media and telecom conglomerate with over 30,000 employees.  It is China’s biggest and most valuable technology company, currently worth ~US$460 billion, making it the sixth largest company in the world and currently approximately the same size as Facebook.  Companies such as Facebook and Google are banned in China, so this helps local players dominate within the country without the same threat of global competitors, whilst also allowing them to expand into the western world.

Let’s learn more about this fascinating company…

Social Media

You may be familiar with WhatsApp and you may even use it on your phone as your primary messaging tool, but are you aware that in Asia by far the dominant messaging app is WeChat?  WeChat is owned by Tencent and has almost a billion monthly active users.  However, unlike WhatsApp, which is primarily just a messaging app, WeChat has become an “all in one” super portal which serves to keep users on the platform and removes the need to visit other sites – not owned by Tencent.  Currently, WeChat allows mobile payments (e.g. instead of using PayPal) and can help assist in hailing taxis (e.g. instead of using Uber), watching videos (e.g. instead of using YouTube), dating or “hooking up” (e.g. instead of using Tinder) and ordering food (e.g. instead of using UberEats or Deliveroo).  This is in addition to the 900+ million users that use QQ, which is also owned by Tencent, and which has many of the same features as WeChat (and more!), but is considered more as a desktop messenger, whereas WeChat is very much a mobile application.

Gaming and eSports

Gaming enthusiasts all over the world are playing games made by companies owned by Tencent.  Gaming companies such as Riot Games (maker of League of Legends), Activision Blizzard (maker of Overwatch and Destiny), Supercell (maker of Clash of Clans), and a 40% stake in Epic Games (maker of Fortnite which is the hottest video game out right now), makes Tencent the leader in the ever-growing sector of mobile gaming and eSports.

Plans to expand to the US and the rest of the world

Tencent continues to find ways to grow internationally.  For example, the company recently acquired a 12% stake in Snap Inc (the parent company of SnapChat) and also holds a 5% stake in Tesla.  It has also announced plans to conduct a US initial public offering (IPO) for its streaming music unit Tencent Music Entertainment (TME), with reports suggesting it could raise $1Billion and value the company at US$30 Billion, which would rival Spotify’s value (which at the time of writing is US$31 Billion).  Interestingly, Tencent owns a 7.5% stake in Spotify, making it the third largest shareholder behind the founders.  Spotify and TME swapped equity stakes in each other last December, so Spotify also has a 9% holding in TME.  This is considered beneficial for both companies, as it gives them the opportunity to invest in the long-term potential of the music market outside of their current regions.

Tencent’s X-Factor

Companies such as Google, Facebook and Amazon generate a disproportionate amount of earnings through advertising or physical goods.  However, Tencent only generates 17% of its revenue through online ad sales compared to Facebook’s 97%.  Instead, Tencent’s main source of revenue is online gaming – selling everything from the game itself to virtual goods such as online gaming avatars, and even clothes for those avatars.  Tencent is also looking at expanding into other areas of technology, announcing plans to open artificial intelligence labs in Shenzhen and Seattle and looking to develop a countertop smart speaker, like Amazon’s Alexa or the Google Home.  Should at least one of these ideas take off, it could well improve Tencent’s brand awareness globally.

How to gain exposure to Tencent?

Tencent is listed on the Hong Kong stock exchange and trades on the Nasdaq OTC market.  So, unless you are buying direct on those foreign markets, it can be difficult and expensive to gain access.  However, the new ASX-traded BetaShares Asia Technology Tigers ETF (Ticker: ASIA) gives you an easy way to gain a diversified exposure to Tencent and other leading Asian technology companies (ex Japan) such as Baidu (which owns China’s dominant search engine), Alibaba (the world’s largest retailer) and JD.com (essentially the Amazon of Asia).  Tencent currently has a weighting of ~9% in the index that ASIA aims to track.  It is also worth mentioning that China shares have sold off since January and are now down over -20%, mainly fuelled by the China/US trade talk concerns. Indeed, this sell-off may possibly represent an opportunity to enter this sector, which may well have been subject to indiscriminate selling, as several of the Chinese technology names aren’t directly affected by US tariffs considering they are doing business primarily within Asia or specifically in China.

It stands to reason that technology should continue to be a long-term thematic and help drive growth in the global economy.  The sizeable underweight of technology in the Australian market may well hurt relative performance of the market going forward, making Asian technology a potential complement to many Australian investors’ portfolios without doubling up on the big tech names you may already have through a Nasdaq or US sharemarket exposure.

Want to know anything else about Tencent or the other Asia Tech Tigers? Do let me know if you have any QQuestions? 🙂

The BetaShares Asia Technology Tigers ETF is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade mark or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the Fund. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade mark for the purpose of use in connection with the Fund constitutes a recommendation by Solactive AG to invest capital in the Fund nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in the Fund.

10 Comments

  1. Norman Murray  |  October 3, 2018

    How long has ASIA been in existence, what sort of return and I would assume that there is no franking credits on the return

    1. Isaak Walkom  |  October 5, 2018

      Hi Norman,
      BetaShares Asia Technology Tigers ETF (ASIA) was incepted on the 18th September this year. There are no franking credits involved with an investment in the Fund as it is an international exposure. Further information such as past index returns can be found on the Fund factsheet here: https://www.betashares.com.au/files/factsheets/ASIA-Factsheet.pdf
      Cheers,
      Isaak

  2. John Lowrey  |  October 3, 2018

    What about currency hedging?
    This is often as important as absolute performance when judging returns.

    1. Isaak Walkom  |  October 5, 2018

      Hi John,
      ASIA is not currency hedged.
      Currency hedging is quite expensive to implement, particularly across a number of different countries.
      With ASIA, it is more practical to provide an unhedged exposure and as a result, pass on cost savings to unit holders in the form of a lower management fee.
      Cheers,
      Isaak

  3. Kenneth Lyra  |  October 3, 2018

    I am interested in acquiring Tencent shares

    1. Isaak Walkom  |  October 5, 2018

      Hi Kenneth,
      Gaining exposure to the single securities that make up ASIA can be quite difficult for investors.
      ASIA currently has a weighting of 9.21% to Tencent. The full list of portfolio holdings can be found here: https://www.betashares.com.au/files/ASIA/ASIA_Portfolio_Holdings.pdf
      Cheers,
      Isaak

  4. Ronald Van Dullemen  |  October 4, 2018

    We are interested in the above. However being retirees we need to get a reasonable cash flow return on our investments rather than relying on just capital gains. What is the position regarding dividend streams for this ETF?

    1. Isaak Walkom  |  October 5, 2018

      Hi Ronald,
      Given the technology focus of ASIA, it is largely a growth orientated Fund.
      Compared to the broader market, technology companies have historically paid lower dividends. Generally speaking, tech companies like to keep a cash balance for the potential acquisition of new technology or for further development purposes.
      In saying that, dividends received by the Fund are distributed to unit holders. The dividend yield (12 month trailing) of the Fund is approximately 1.39%.
      Cheers,
      Isaak

  5. Hello Isaak,

    Great fund. Those shares you mentioned are at year lows so a pretty good place to buy. Thanks, Sara.

  6. Xiawei Zhang  |  October 15, 2018

    Great article! Now some of the Chinese Tech Companies, such as Tencent and JD, are really showing value, and its great timing to allocate. Some new listings such as Meituan-Dianping and Xiaomi are also considered giant players.

Leave a Reply