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CHINA Internet Is Much Bigger Than Ours.

|Includes: Alibaba Group Holding Limited (BABA), MCHI, TCEHY

Summary

350 Million people are expected to move to 23 "New York Sized" cities around various regions of China.

Make way for the new Chinese Middle Class Consumer with internet access, free time, and money.

TEN CENT Holdings network effect and wide moat at play.

As society matures and becomes more efficient, free time increases and demand for leisure activities increases. In China, hundreds of millions of people are flooding from the countryside into the cities. And while over 300 million people have already migrated in the past 30 years, McKinsey predicts there are another 350 million yet on the way.

Such a huge migration of people changes almost everything: cities, required infrastructure, environmental impact, required resources, the economy, etc. As cities contain virtually every aspect of life, such a migration changes virtually everything in China. However, this is not just an economic and demographic trend (which we will discuss). It is also a cultural phenomenon. 

A good way to think about the past 30 years in China is as one big consumer transition. People went from “subsistence living” to being able to purchase the full range of life’s basic goods. They went from focusing on food and shelter to filling up their homes with basic products like washing machines and sneakers. We are now seeing another big transition. China’s consumers are starting to look to more emotional and aspirational needs. They are increasingly going to Starbucks, traveling overseas, wearing luxury brands, buying iPhones, going to the movies and choosing furniture based on how it fits their sense of self. The transition from basic goods living to emotional purchases is enabled by Tencent Holdings applications.  

 As a long-term investor, it will be important to understand the massive implications of more Chinese on the internet; online/mobile advertisements, e-commerce, device-to-device direct payment and mobile games will also benefit. 

With the democratization of the internet, rise of a middle class, and growing access of internet users, Tencent holdings is a simple play on all of these trends. TENCENT is essentially many of America’s best companies in ONE. Facebook + Netflix + Apple Music + iMessage + EA Sports+ Nintendo + WhatsApp + PayPal

Let’s look at the trends in China that Tencent will continue to capitalize on.

1. Please welcome, China Online! Only 52% of Chinese people have regular internet access in 2016 compared to 78% in the USA.* If you didn’t know, Facebook is not allowed in China. They have only ONE office there despite having 2 Billion active users *; only 50 million users of Facebook live in China.

2. Rapid growth of Chinese Economy: From 2000 to 2010, the size of the Chinese economy more than doubled; consumption grew from around $650 billion to almost $1.4 trillion. China’s consumption has been growing faster than just about any other country’s in absolute terms. *

3. Consumerism is growing because of a growing the middle class. This is the largest migration in human history as 300 million people are moving to cities and 350 million more primed for move. 200 million people will enter the middle class by 2026.*

For context, lets look at some numbers quickly.

USA Population:                              323,000,000 (78.2% internet users)

China Population:                           1,379,000,000 (39% internet users)

Amazon Market Cap :                   $462B

Facebook Market Cap :                  $493B

BABA Market Cap :                        $427B

TENCENT:                                      $383B

The USA market for Social media, eCommerce, Ad revenue is going to experience diminishing returns while the Chinese market is going to experience linear (to exponential) growth within the next 5 years.

 

TENCENT Overview

a. Digital Advertising – 938 million highly-engaged users on WeChat, the “Super-app” .

b. Video Game Publishing – High margin, high ROIC business that throws off significant free cash flow .

c. Mobile Payments – WeChat Pay is one of the largest mobile payment platforms in China. WeChat pay has 40% market share with 600,000,000 daily transactions. Estimated 1.2T dollars passed through the system last year. 

d. Media Subscriptions – Over 100 million people subscribe to Tencent’s news platforms, music, movies, video, and original content (think Apple Music, Youtube, and Netflix combined).

e. Ecommerce – Tencent is a partner & minority owner of JD.com; WeChat is a potential ecommerce hub 


A look at WeChat: WeChat is there everything you do on your iPhone in ONE APP.

  • Messaging (no more texts or emails) 

  • Social Networking 

  • Work Groups (Slack alternative) 

  • Online Shopping and Mobile Payments 

  • Payments at Physical Stores 

  • Much more.... paying bills, hailing cabs, ordering food, sending money to friends, event tickets, etc... All without ever having to leave the WeChat app

 

WeChat’s Network – Used by everyone in China for chat, payments, work groups, social, shopping, money transfers, hailing cabs, paying bills, and much more.

“Yu Hui’s father uses the app to shop online, to pay for goods at physical stores, settle utility bills and split dinner tabs with friends, just with a few taps. He can easily book and pay for taxis, dumpling deliveries, theatre tickets, hospital appointments and foreign holidays, all without ever leaving the WeChat universe.” – WeChat’s World, The Economist

WeChat is a classic network effect with a wide moat: Network effect results when each incremental new user increases the value for everyone else. WeChat attracts users because of its extremely high-value user experience 
along with developers, merchants, and advertisers that want to sell something to these users 
and this attracts more users.

 

Why video games can’t be ignored: Tencent publishes the most widely recognized games in the world such as League of Legends, Clash of Clans and Honor of Kings. Video games are a great business because they make a product ONCE, can resell it MANY, MANY times. Also, China has 417 million gamers online.* Tencent has revenues of 10.2B in revenue from video games alone, a number that is 3 billion dollars ahead of Sony. 

 

TENCENT Financials overview

a. Market Cap: $377B

b. Share Price: $40.93

c. P/E: 39 – 40 range.

d. Sometimes a 40 P/E stock is cheap and sometimes a 10 P/E stock is overvalued 


e. Past examples: Starbucks was very undervalued at 50 P/E; Kodak would have been overpriced at 5 P/E 


d. Your call.   

But keep on eye out for regulation* ; A wider or more heavy-handed crackdown by authorities on the online gaming sector could pose significant challenges for China’s tech champions. Like the West, the Chinese Internet is dominated by a few big companies. The big three are Baidu in search, Tencent in instant messaging and gaming, and Alibaba in e-commerce. Watch carefully as demographics, migration, and the rise of the middle class coincide with the Chinese internet boom.

 

 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: See book; Towson, Jeffrey. The One Hour China Book (2017 Edition): Two Peking University Professors Explain All of China Business in Six Short Stories (p. 130). Towson Group LLC (Cayman Islands) for all types of China ideas - from real estate, tech to internet trends.