Tencent is the largest IM (instant messaging) service provider in China with 580M users.
The below chart from Google Trends shows the relative frequency of keywords (QQ, ICQ, MSN) search in China. This is a very good indication of each site's relative popularity among Chinese internet users. We can see 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, and 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. Very impressive !
Online advertising revenue increased by 137% YoY. The majority of such growth was attributed to increased in-game advertising revenue. In-game advertising 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 user growth is at an even higher rate of 41.1%, reaching 91M. Country internet penetration rate is 10.5%, versus mobile phone penetration of 40%. There is 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, the corporate tax rate will be standardized to 25% for both local (used to be 33%) and foreign enterprises (it used to be 15%), with a 5 year grace period. It will have no effect to Tencent (Tencent is a 'foreign' company from a tax perspective because it is registered in Hong Kong) because it is based in Shenzhen and the Shenzhen government still honor the special 15% tax rate for which 'strategic high tech' companies located there are eligible.
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 investors should 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
TCEHF 1-yr chart