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WeChat for Profits

December 10, 2020

For those that think that the US is the most advanced tech nation, you need to plan a post-COVID-19 trip to China.

In China, cash is long gone. Everything is done electronically, especially via smartphones.

Shopping is all done via phone and online. Payment systems are seamless, linking bank accounts, credit lines and everything else centrally.

Communications are all done through unified systems, including social media. Media is done through subscription and unified for both videos and games. And everyone that you would get to know is on the network and easily accessible.

WeChat is the core hub for communications, payments, investments, insurance and so much else that it’s hard to fathom not having it inside China or in the region, or even in the US if you deal with anyone in China.

On my Chinese-made BlackBerry, WeChat is the prominent app on my screen. Whether in China or beyond, it’s my link to everyone, and it’s how I get around when I’m there.

It’s owned by Tencent (TCEHY), one of the biggest technology companies in the world, headquartered in Shenzhen.

The company is ubiquitous in China and is used by everyone there, particularly in the Regional Comprehensive Economic Partnership (RCEP) member markets.

The company organizes its operations and investments in several external companies, including online commerce company JD.com (JD), into six core platforms.

It starts with communications. WeChat is the method of online communications that forms a major base for Tencent. It’s the starting point for most of the other platforms.

It’s joined by QQ, which is an app that runs on all operating systems around the world and expands online services of Tencent, including payments.

Next up is its gaming platform. Mobile and online games are already huge around the globe, and Tencent is a major leader. It’s the largest gaming firm by revenue globally.

Media is next, with video, news and literature all bringing Tencent’s operations to the top of the Chinese and regional market. There’s also music, where Tencent rules streaming under Tencent Music Entertainment (TME).

Tencent’s financial technology, or “fintech,” system provides everything from wallets to banking and credit facilities, including insurance and investments. Again, it’s the largest in China.

Then there’s Tencent’s version of Alphabet (GOOGL) that provides the nation’s leading browser, complete with all of the ad revenue that has made Google so powerful. And it’s also a leader in locking down its customers’ smartphones, tablets and PCs with its online security.

Cloud technology rounds out the platform. And like games, media, financial transactions and accounts and everything else that works in the cloud, Tencent rules this market. It’s like a combination of Amazon (AMZN) and Microsoft (MSFT).

This company gets along very, very well with Beijing, which is important for Chinese companies and investors in Chinese companies.

It also comes with venture capital and investment funds that have current major holdings in many of the bold-faced technology and commerce companies in China and the region.

It not only provides capital and takes equity stakes, but it also nurtures and provides preferential access to its platforms for company developments.

Tencent shareholders benefit from this both in current revenue generation and longer-term appreciation in these investments.

In ESG (environmental, social & governance), Tencent continues to address the environment, which is rapidly becoming a primary goal of the Chinese government. It’s also focused on local communities and constituents.

Tencent works on its governance not just in China but with global financial and government regulators and continues to (outside of the recent spat over WeChat in the US) be well received by authorities beyond China.

WeChat About Numbers

Revenue for Tencent makes for a great conversation. Sales growth over just the trailing five years is averaging a compound annual growth rate (CAGR) of 34.7%.

Tencent Revenue—Source: Bloomberg Finance, L.P.

With such scale from its platforms, margins are very fat at 29.5% on an operating basis. This works to drive shareholder wealth with a return on shareholder equity of 24.9%.

It would be great just to focus on the revenue and profits, but Tencent is also focused on building value.

Each of its platforms has major barriers to competitors. Even Alibaba (BABA), as good as it is, is still trailing Tencent on many fronts. And as noted, its investments also continue to build in value.

Tencent Intrinsic (Book) Value—Source: Bloomberg Finance, L.P.

This shows up in the intrinsic value of Tencent. This is the meltdown value of the assets net liabilities, also known as book value.

Over just the trailing five years, Tencent has built up the intrinsic/book value for shareholders on an average annual basis of 38.6%.

If the company’s intrinsic value rises by this significant amount along with the current revenue and profits, it makes for a compelling case to buy and own it.

Tencent & S&P Information Technology Index Total Returns—Source: Bloomberg Finance, L.P.

For investors in Tencent, the return has been proof of the capability, mission and work of the company.

It has returned 1,529.8%, which is near triple the return of the go-go technology market index of the US, over the past 10 years. For 2020 to date, Tencent keeps the outperformance up over the general US technology index.

You’ll be buying a stock that’s highly valued at 8.3 times intrinsic value and 10.4 times trailing sales. But both of those values are a snapshot of trailing intrinsic and revenues; both should continue to prove to expand.

And when compared to the price to book of the S&P Information Technology Index, it’s at a discount. On a price to trailing sales basis, it’s comparable.

Yes, it has a dividend, but it isn’t much as the company retains and reinvests it.

TCEHY is a buy as a great total return stock, ideally for a taxable account given its foreign status.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life