Disclaimer: These notes are shared for informational and educational purposes only. THIS IS NOT INVESTMENT ADVICE.

These notes were composed on March 31, 2019 for the China Tech Investor podcast episode 19, listen on anchor.fm. Tencent is traded under 0700 in Hong Kong and ADRs under TCEHY.

Here is Tencent’s Q4 2018 investor presentation

Mini Programs

  • working well, but need developers. Working with over 100 universities to include MPs in their curriculums. Students make up 24% of MP developers in China

Cloud

  • Revenues doubled to RMB 9.1 B
  • Paying customers more than doubled for Q4
  • “Clear market leader for online games and video customers”

Retail → Digital transformation

  • customer engagement with CRM & data analytics
  • lot of buzzwords: marketing ROI, customer targeting, AI, LBS, and Big Data, Smart Solutions

Strategic Upgrade:

Shek Hon Lo (CFO & Senior VP): “I would like to let you know that following our strategy — strategic upgrade from the consumer Internet to the industrial Internet, we will add a new revenue segment to better reflect our evolving business mix in this quarter. “

What is the new segment going to be?
My two guesses: financial or cloud services.

Earnings Call Q&A notes:

Online video:

  • Delay in online video content launches
  • “costume drama series” relatively important to drive advertising and subscription revenue.

Games pipeline:

  • 7 new smartphone approved, 1 PC game, since resumption of BanHao
  • several dozen more in pipeline
  • Backlog of approval will likely have some impact on industry growth

Advertising margin:

  • High margin: weixin moments
  • Middle: Official Accounts
  • Low: video entertainment content

2019 Gross Margin, puts and takes:

  • WeChat pay:
    1. Take revenue from merchants and customers
    2. Big chunk goes to bank charges
    3. No interest income from reserve cash
    4. Trying to compensate with fintech products
    5. – *IF* bank charges get reformed, it’d be a big upside for Tencent
  • Pony Ma showing some real integrity here, pouring some cool water on WeChat’s payment platform. After talking about Gross Margins:
    • “But below the gross margin, there’s actually a marketing cost, which is actually also very high, because despite the fact that we have positive gross margin on the growth side, we are actually engaged in a lot of marketing activities, including consumer subsidies, including some merchant rebates in order for us to continue to build market share and also make our payment mechanism — I mean our payment platform more popular with merchants.”
    • Tencent will run payment platform as an infrastructure service, meaning lower margins
  • Content costs rising.
    • Should be recurring. Their business is a content business. Games is content. Video is content. Music is content.
    • Tencent already is a digital services business.

Free Cash Flow is growing

  • Q4’18 up 18% yoy to RMB 28.6 B
  • FY18 up 11% yoy to RMB 83.4 B

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