Tencent: Where Unicorns Thrive

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About: Tencent Holdings Limited (TCEHY)
by: Kevin Carter
Summary

Tencent has historically invested in many emerging technologies and companies.

Tencent announced its intentions to continue investing in start-ups.

Tencent itself is a beneficiary of outside investments.

Tencent has spun-off several of its investments to unlock value for its shareholders.

Collectively, Baidu (BIDU), Alibaba (NYSE:BABA), and Tencent (OTCPK:TCEHY) are known as the BATs. These companies are among the leading technology companies in China. But from where may the next big idea in China emerge? And how may investors realize some of that potential?

Tencent, historically, has invested heavily in emerging technologies and companies. This article highlights Tencent's investment strategy and some of its recent successes.

Investors looking to profit from the next big idea in emerging markets may want to consider an investment in Tencent.

Tencent - Where Unicorns Thrive

Recently, Tencent president Martin Lau gave a speech at Tencent Investment's 'Insight & Forecast Conference' in Beijing. There, he gave some insights into Tencent's investment strategy as well as highlighted many of its successes.

Mr. Lau highlighted that in the past ten years, Tencent invested in more than 700 companies. Among the 700 companies, 63 are now listed and 122 are unicorns with market capitalization or value of more than $1 billion. During 2018, 16 of the invested companies went public, including the much-publicized Tencent Music Entertainment Group (TME). The combined total market capitalization of companies in which Tencent holds more than 5% now exceeds $500 billion.

What Are Some of Tencent's Investments?

An article in pymnts highlighted some of Tencent's larger investments. It cited 12% investment in U.S. camera application company Snap (NYSE:SNAP) and its investment in China International Investment Corp. (OTC:CHAOY). It has invested heavily in India through an investment in a music service called Gaana, along with an investment in food delivery app Swiggy. According to the article, Tencent also reportedly invested in ride-sharing - specifically, Go-Jek, the Southeast Asia ride-hailing company. In a previous note, we highlighted Tencent's 40% stake in Epic Games, creator of Fortnite.

Notable spin-offs from Tencent include China Literature and artificial intelligence company Sogou.

Why Look Outside?

Tencent is a large company with plenty of resources. Why does it invest in external companies rather than create the technologies internally?

Tencent has aspirations of expanding its technology offerings. However, the company found that building the businesses internally was not always the most efficient means. For some products, the expertise did not exist internally or was not a core strength. For others, it may divert resources from other units. Sourcing the technology externally via investment allows Tencent to focus on doing what it does best while still expanding into newer technologies. And it allows the company to invest outside its home base of China.

A Core Strategy

Mr. Lau identified investment as a core strategy for Tencent. Investment allows Tencent to focus on their platform and business to provide better services for partners and investment companies. The company cited its investments in several companies to create Tencent Video, still a unit within Tencent, as well as investments that helped to create WeChat Pay, a leading Chinese online payment platform.

Investing Is in Tencent's DNA

Investing is in the DNA of Tencent. The company itself was the beneficiary of the same type of venture cap investing when, in 2001, South African media giant Naspers (OTCPK:NPSND) acquired a 46.5% stake in the start-up that would eventually become Tencent. While Naspers still holds a 33% stake in Tencent, it announced that it intended to spin-off its Tencent stake in a separately traded company that would hold of its interests outside of South Africa.

Strategy Moving Forward

Mr. Lau highlighted the company's strategy moving forward. First and foremost is creating an open and fair platform in our business so that everyone can achieve the highest value through their excellent ability. In the regard, the company places creating user value as a paramount concern. Second, it aims to build the best team to identify and execute its investment strategy. Third, since many of these are emerging ideas, there is a focus on avoiding pitfalls such as excessive discounting and subsidies. Fourth, choosing its investors wisely. Finally, aims to always put the interests of the user over the company's.

Delivering the Coal When It Is Snowing

Mr. Lau anticipates that 2019 will present greater challenges than previous years, particularly with the possibility that the Chinese economy may slow down. But the company's resolve is to find the best investments and take advantage of opportunities whenever and wherever he arrives. Says Mr. Lau, "we must be the ones delivering coal when it's snowing."

Summary

Tencent has a history of investing in companies with either complementary technologies and services as well as emerging products and technologies. These have been used to either strengthen the company's existing platforms or to expand into new areas. Many of these investments have become successful and spun out of Tencent.

Investors looking for the next big idea in China may be well-served by considering an investment in EMQQ - the Emerging Markets Internet & Ecommerce ETF.

Disclosure: I am/we are long TCEHY, BABA, BIDU, CHLLF, SOGO, NPSNY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am the founder of the Emerging Markets Internet and Ecommerce Index, which is licensed to Exchange Traded Concepts and serves as the basis for the Emerging Markets Internet and Ecommerce ETF (EMQQ). I manage an Emerging Markets Hedge Fund that is sometimes long constituents of EMQQ and myself and my family are long EMQQ.