Seeking Alpha

Tencent: Dominant Player In Multiple Fields

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About: Tencent Holdings Limited (TCEHY)
by: WY Capital
WY Capital
Long/short equity, special situations, contrarian, Growth
Summary

Tencent is the leader in multiple fast-growing industries.

It owns stakes in many promising companies.

Overall, Tencent is undervalued if a conservative valuation is used.

For the last two years, Tencent's (OTCPK:TCEHY) stock price has been quite stagnant. The market cap has continued to hover around $400 billion. Considering its leadership positions in gaming, communications, and many other fast-growing industries around the world, we think Tencent is massively undervalued.

Source: Google images

Gaming

Tencent is unquestionably the world leader in gaming. It has investments in or outrightly owns many of the largest gaming companies in the world. When we recently asked a few local students what games were played at their school, they mentioned names like Brawl Stars, League of Legends, and Candy Crush, all of which Tencent has invested in.

Tencent doesn't just make money from games, though, it makes money from everything surrounding gaming. It has stakes in game streaming companies like Huya (HUYA) and gaming platforms like Garena, owned by Sea.

Source: Newzoo

This puts Tencent in a good position to capture the over $150 billion gaming market, forecasted to grow to over $200 billion by 2022. It currently only generates $15 billion in gaming revenue per year, so there's definitely much room for growth for this segment.

Communications

Tencent has both the leading web and mobile instant messaging platforms in the form of QQ and WeChat, respectively.

Source: Google images

These platforms have 808 million and 1.13 billion users, respectively. The messaging portion of the platforms by themselves is already worth billions, considering the $26-billion sale of WhatsApp to Facebook, but these platforms offer more than just messaging. We believe the main value from these platforms is as a traffic generation tool to divert users to other services that are more lucrative for Tencent.

Take QQ for example, which is mainly used for communication. However, QQ also offers a game platform, a payments service, QQ Music, and other services. This makes QQ much more valuable than a similar communications app like WhatsApp, which is barely monetized and only generates revenue from messaging and stories.

Of course, Tencent also has invested in many promising companies in this area like Discord, a messaging app for gamers, or Hike, an Indian messaging app.

Within QQ, Tencent also operates QZone, a social networking platform.

Payments and Fintech

Tencent came 9 years late to the fintech party, but with WeChat Pay, it has still captured over 40% of the payments market.

Source: Google images

Today, WeChat Pay claims to be the top mobile payments platform in China, with over 500 million transactions per day and with over 800 million MAUs. Tencent also offers QQ Wallet for those using QQ.

Tencent's Fintech segment generates nearly $90 billion in revenue per year and is growing 37% YOY. Tencent has recently launched additional financial services, including creating an asset management platform called LiCaiTong, which had nearly 800 billion in AUM at the end of Q2.

Media

The media segment consists of many things - Video, literature, news, and music. We believe the largest segment within media consists of video.

Within long-form video, it has the number two service, Tencent Video, which slightly trails behind leader iQiyi with 96.9 million subscribers as of Q2.

Source: Google images

Within short-form video, it is waging war against leader Douyin by investing in Kuaishou, widely regarded as the 2nd most popular short-form video service in China.

Source: Google images

Tencent has also listed its subsidiary, Tencent Music, which is currently valued at over $20 billion on the NYSE. It provides literature through China Literature Group, but this doesn't seem to have been very successful, as user statistics have not been disclosed.

Source: Tencent product list

It also provides news through apps like Tencent News, but it lags behind apps like JinriToutiao or QuToutiao.

E-commerce

It is well-known that Alibaba is easily beating Tencent in e-commerce in China. However, Tencent hasn't given up yet, investing large sums into JD (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD).

Internationally, it has investments in Sea, which operates the popular e-commerce site Shopee in Southeast Asia.

Miscellaneous

Tencent doesn't only consist of the above segments, it also has investments in ride-sharing through Didi Chuxing, food delivery through Meituan Dianping, education platform Byju, and many more.

It also has two other major segments, cloud and utilities. Tencent Cloud is the 2nd largest cloud provider in China and QQ browser is a leading utility tool.

Valuation

Communications $200 billion

The best way to value this segment is to use Facebook as a comparable. Facebook is valued at $550 billion for having ~2.4 billion MAUs. To be conservative, we'll assume all of QQ's users use WeChat and we'll value Facebook's users as 25% more valuable than Tencent. At this valuation, Tencent's communications division alone would be worth $200 billion.

Payments and Fintech $100 billion To value this segment, we'll use Ant Financial as a comparable. Ant Financial is valued at $150 billion and is slightly larger than Tencent's payments division. Therefore, to be conservative, we'll value Tencent's payment division at $100 billion, or two-thirds of Ant Financial.
Tencent Video $12 billion This should be valued slightly lower than iQiyi for its slightly lower subscriber count.
Tencent Music $13.3 billion Based on TME's price on the NYSE.
Tencent Games $90 billion Based on using ATVI and EA as comparable companies, which is conservative as Tencent Games is growing faster than ATVI and EA.
Pinduoduo $8.5 billion Based on PDD's stock price
JD.com $10 billion Based on JD's stock price
Sea Limited $4.5 billion Based on SE's stock price
Meituan Dianping $14 billion Based on Meituan Dianping's market cap in USD
Kuaishou $7.6 billion Tencent is reported to be increasing its stake in Kuaishou to 30-40%, valuing Kuaishou at $26 billion. This valuation assumes Tencent would own 30% of Kuaishou.

To value Tencent, we first valued the major segments of Tencent - Gaming, Payments and Communications. We then added the larger stakes that Tencent had that were not related to Gaming, Payments, and Communications as Tencent would've consolidated these stakes in its financial statements.

In total, we received a valuation of $460 billion, which is likely conservative considering the smaller minority stakes weren't included and considering we used conservative methods to calculate the value of Tencent's larger segments. Even so, Tencent is still 15% undervalued at current levels. If 15% upside is too little, an investor could consider Naspers (OTCPK:NPSNY) instead, which trades at a moderate discount to its Tencent holdings.

Takeaway

Overall, Tencent has leadership positions in many industries as well as stakes in some of the most promising companies in the world. Its current valuation is extremely conservative, and fair value should be somewhat higher.

Disclosure: I am/we are long 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.