Tencent's Fake Guns Mean Real Money for Global Acquisitions
Martin Lau, president of Tencent Holdings Ltd.
Nelson Ching/Bloomberg
Martin Lau, president of Tencent Holdings Ltd.
Martin Lau, president of Tencent Holdings Ltd. Photographer: Nelson Ching/Bloomberg
Tencent Holdings Ltd., the world’s biggest online games company by market value, earns real money selling fake weapons in games such as “CrossFire.” That’s led to a $2 billion war chest that can help fund takeovers outside its home of China.
Tencent may seek to buy U.S. or South Korean studios to develop online games for China, said Andrey Glukhov, a New York- based analyst at Brean Murray Carret & Co. It could also target dominant Internet companies in emerging markets for expansion, according to Justin Weiss and Galant Ng, analysts at JI Asia in Tokyo and at Taifook Securities in Hong Kong.
Founded by billionaire Ma Huateng, Tencent boasts more users than Facebook Inc. It may lead Chinese game companies in an acquisition spree to recruit overseas talent after foreign titles such as “CrossFire,” developed by South Korea’s Neowiz Games Corp., replaced local blockbusters such as “QQ Fantasy” as the most popular games in a market forecast to double to $10 billion by 2014.
“The international market is an area where you should continue to see Tencent put more assets and cash to work,” Brean Murray’s Glukhov said. “They have been pretty aggressive looking for studios they can be an investor in, or outright acquire.”
Cash Pile
The company’s cash, equivalents and investments may rise to 36.9 billion yuan ($5.5 billion) by the end of next year, from 13.9 billion yuan at the end of June, according to estimates by Eric Wen, an analyst at Mirae Asset Securities Co. in Hong Kong.
Tencent, based in Shenzhen, has already started investing. In April, Tencent paid $300 million for a 10 percent stake in Mail.ru Group Ltd., the Russian internet portal that holds a stake in Facebook and was then known as Digital Sky Technologies Ltd.
Tencent bought half of Thai Web portal Sanook for $10.5 million in August, adding to investments in India’s Ibibo.com and San Francisco-based software publisher Outspark. The company also set up a studio in Boston that’s making a fantasy-based multiplayer game.
“Cash-rich Chinese online game operators have used their money wisely and tried to acquire studios outside China,” said Lisa Cosmas Hanson, managing partner of Niko Partners, a San Jose, California-based researcher focused on China. “Can they be great, world-class companies? In some markets like Southeast Asia, they can be great.”
International Strategy
Going international “gradually” is part of Tencent’s strategy, President Martin Lau said on a conference call in May. Jane Yip, a Tencent spokeswoman, declined to elaborate or make executives available for comment.
Shanda Games Ltd., China’s second biggest online games operator, is also pursuing acquisitions. It bought Eyedentity Games, a Korean studio, and San Francisco-based Mochi Media this year. Shanda is looking at Southeast Asia for future growth, said Ellen Chiu, director of investor relations at Shanda Games.
Tencent’s profit surged more than 10-fold in the past five years and its shares have jumped more than 20 times, giving it a market value of HK$328 billion ($42 billion) as of yesterday.
That dwarfs the $5.51 billion value of Zynga Game Network Inc. -- the maker of the “FarmVille” game on Facebook -- as estimated by SharesPost Inc. last month. Nasdaq-listed Shanda is valued at $1.8 billion and NetEase.com Inc. $5.6 billion, based on their closing prices yesterday.
Tencent, which discloses earnings tomorrow, will likely report third-quarter profit rose 51 percent, according to the average of 10 analyst estimates compiled by Bloomberg. Wen estimates half of sales came from online games as its largest source of revenue.
Body Armor
Tencent’s profitability increasingly stems from selling items in free games, a strategy imported from Korea, said Mirae’s Wen.
In “CrossFire,” which Tencent licenses from Seoul-based Neowiz, players buy items such as body armor and assault rifles, similar to the way Zynga charges “FarmVille” players cash to buy gas or other items.
Sales of virtual weapons helped give Tencent a profit margin of 41 percent last year, compared with Google’s 28 percent, according to Bloomberg data.
Founded in 1998 by Chief Executive Officer Ma, Chief Technology Officer Zhang Zhidong and fellow 1993 graduates of Shenzhen University’s computer science program, Tencent was built around its QQ Instant Messaging service. That service had 612.5 million active user accounts at the end of June, according to the company’s Web site. Facebook said it passed 500 million in July.
Ma’s Stake
Ma’s 11 percent stake, worth $4.6 billion at current prices, makes him the second largest shareholder in Tencent after South Africa’s Naspers Ltd. He ranks 11th overall on the Hurun Report’s latest list of the nation’s richest people.
Tencent launched its QQ Game Portal in 2003 and went public on the Hong Kong Stock Exchange in 2004. In 2005, it started the QZone multimedia social networking service, where users can post photos and listen to music.
In the third quarter, Tencent accounted for 29 percent of China’s online games market, compared with Shanda’s 18 percent, according to estimates at Analysys International in Beijing.
Expansion abroad is the next logical step, JI Asia’s Weiss.
“I see no reason for a social networking company that dominates its home market to be content with growth at home,” Weiss said. “If you don’t expand overseas, you are ceding that market to someone else.”
To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net.
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