Tencent is sturdiest rock inside China’s firewall

August 18, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own. 

China’s firewall has allowed the country’s trio of web giants to thrive. But as Baidu, Alibaba, and Tencent¬†battle it out for dominance, one looks much better than the rest.

Just two years ago, Alibaba was China’s tech champion. Soaring sales lifted the value of Jack Ma’s e-commerce group to a high of $296 billion. Less global attention was paid to search engine operator Baidu and social media and gaming group Tencent, two smaller and less hyped local competitors.

Yet Alibaba has lost some of its shine in recent months amid slowing growth and run-ins with Chinese and U.S. regulators. Ma’s unpredictable and aggressive deal-making, including investments in a soccer club, a smartphone maker, and a Hong Kong newspaper, has led to volatility in the share price which is now almost 20 percent below the 2014 peak.

The $60 billion Baidu has also stumbled. The company’s core search business has been hit hard by an advertising crackdown while investments in loss-making ventures like video and food delivery have squeezed margins.

Tencent, run by the more low-key Pony Ma, is under no such stress. The Hong Kong listed company’s shares are up over 32 percent this year. With a market capitalisation of more than $240 billion, the gaming company is as big as Alibaba.

Two factors explain the diverging fortunes. While Alibaba and Baidu are heavily dependent on e-commerce and advertising respectively, Tencent is more diversified.

Online games, a notoriously hit-driven industry, now account for less than half of revenue at Tencent. The company has grown more stable income streams by selling advertising, music, and even video subscriptions, through WeChat, the company’s popular messaging platform with over 800 million monthly active users. As a result, adjusted EBITDA margins are holding steady at around 50 percent.

Tencent has also remained focused. Acquisitions, such as that of Finnish mobile games maker Supercell, have obvious ties with the existing business. And when Tencent invests in non-core areas, it limits itself to taking minority stakes – reducing the financial burden and the risk.

The tech company run by the other, more sensible Ma, is emerging as the king of China’s web giants.

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