Threatened by new arrivals
Bytedance is a mere shadow of Tencent, but it owns the fastest-growing social media apps in the world
At just 20 years of age Tencent is beginning to look a bit tired. That’s bad news when you’re operating in an industry that requires superhuman agility.
It’s not that the China-based internet giant doesn’t still have a staggering array of hugely popular offerings that continue to generate the sort of returns most corporate executives can only dream of. It’s that, as China-based analyst Matt Brennan says, “it’s struggling to tell a growth story”.
Brennan, who has written extensively about a group that has generated huge value for SA investors, does point out that Tencent has never been much good at communicating any sort of story. Unlike Alibaba founder and chairman
Jack Ma, Tencent CEO Pony Ma (no relation) is described as introverted “and a bit of a geek” who evidently sees little benefit in public relations.
The lack of a growth story may have contributed to 2018 being one of the worst in Tencent’s history.
Its share price, which seemed to only ever go in one direction, shed 30% of its value.
The high-profile and escalating trade tensions with US President Donald Trump have also not helped recent investor sentiment.
Of course, the single biggest factor behind Tencent’s annus horribilis was the Chinese government’s crackdown on video gaming, which is being talked of increasingly in terms of addiction. The crackdown included a temporary, and for Tencent very costly, freeze on all new gaming approvals. It also forced the group to impose tighter age and playtime restrictions.
Gaming accounts for nearly a third of Tencent’s revenue and the crackdown reversed the previous double-digit gaming revenue increase to a single-digit decline in the most recent quarterly results.
Strong growth in online advertising — which accounts for a mere 17% of Tencent’s revenue, compared with Facebook’s 97% — provided a cushion, but the 24% total revenue increase was the slowest in three years.
Chinese regulators are expected to ease off in 2019 and resume the granting of approvals needed to monetise the games.
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It’s a tough call for the government; gamingaddicted youngsters have become the stuff of chilling urban legend but the government won’t want to cripple Tencent, as one of a handful of global champions, for which it is an important cash cow.
It will presumably also want Tencent on its side for the rollout of China’s staggeringly ambitious social credit plan in 2020.
The plan is essentially Discovery’s Vitality programme on steroids; it’s not just about health and fitness, but about policing every aspect of the lives of China’s 1.4-billion citizens and rewarding or punishing them accordingly. The detailed monitoring involved will require input from major data collectors such as Alibaba and Tencent.
But to get back to Tencent’s premature old age, it’s been brought on by a new kid on the block. Just as in Hollywood, so, too, in the tech world, there’s nothing quite like a new kid to show up the reigning star’s vulnerability. Right now Beijing-based Bytedance is a mere shadow of Tencent, but it owns the fastest-growing social media apps, not just in China but in the world. One of them is Tiktok, which has notched up more than half a billion users in just two years. Significantly, given Tencent’s battle to grow Wechat outside China, 40% of Tiktok users are not in that country.
In addition to Tiktok, which allows users to share videos of themselves lip-syncing, cooking or dancing, Bytedance also owns Vigo, another one of the top 10 most downloaded apps worldwide.
That’s not all. As well as the two worldranked apps, Bytedance owns a popular China-based news app, called Today’s Headlines, which it launched in 2012. About 240million active users a month spend an average of 74 minutes a day on the news platform.
While Bytedance doesn’t offer anything like the breadth of products that Tencent has, Brennan says its apps account for 6% of the time that users, mainly youngsters, spend on their phones. That’s time and advertising revenue lost to Tencent.
Inevitably, investors are a little ahead of themselves. The latest talk is of a valuation of around
$75bn for Bytedance, up from $20bn a year ago, and that at a time when tech has seemingly fallen out of favour.
Bytedance is far from unseating Tencent from its rich throne, but, given tech investors’ obsession with bright new things, it’s probably just as well that Naspers’s e-commerce unit managed to reduce its trading losses materially in the six months ended September.
This might help Naspers seem less like a small add-on to Tencent.
Razeen Dinath, head of equity research at Cadiz, says the latest results indicate Naspers is on track to improve the profitability of the internet and e-commerce businesses.
The current trading profit margin of 24.7% on the profitable businesses “highlights the potential in the other internet and e-commerce businesses, which could also contribute to good profits in the future”, says Dinath, adding: “There are still a lot of nascent e-commerce businesses that are scaling up and making losses, which makes the overall profitability look poor.”
Naspers CEO Bob van Dijk says the group’s “fundamental position is incredibly strong” and that e-commerce results benefited from growing volumes and increasing geographical spread.
The $8.7bn war chest will be used to bulk up on its existing core segments, which include
If the video entertainment business is to survive as a listed entity on its own it will have to up its game
online classified, food delivery and fintech payments.
Van Dijk says the group is seeing a lot of opportunities but will make sure it remained extremely diligent about its capital allocation. Vestact’s Byron Lotter, who welcomes indications that the e-commerce business is becoming self-sustainable, says that given Naspers’s size any acquisition would have to be substantial to move the needle.
He says the group is positioning itself to benefit from the global spread of internet access. “Their allocation of capital is very good.”
Sadly for those in the industry, Lotter is not the only analyst who doesn’t pay much attention to Naspers’s media origins. “The rest of the group has grown so much.”
And then there’s Multichoice, whose product offering has been made to look decidedly old and excessively overpriced by the arrival of serious competition in the form of the very agile Netflix.
These are likely to be the last set of Naspers’s interims to include the video entertainment business. Multichoice was a hugely important part of Naspers — without it Tencent would not have happened — but if it is to survive as a listed entity on its own it will have to significantly up its game.