Tencent to Step Up Overseas Expansion as Competition Heats Up

Tencent Holdings Ltd. (700), China’s biggest Internet company, will step up overseas expansion and increase spending on operations from e-commerce to social media because of intensifying domestic competition.

Tencent wants to buy well-run Internet businesses with strong market positions overseas, President Martin Lau told reporters in Hong Kong yesterday after announcing a 46 percent gain in fourth-quarter profit to 2.2 billion yuan ($335 million).

The Chinese company, which has a bigger market value than EBay Inc., is boosting social media services such as micro-blogging and expanding e-commerce as rival Baidu (BIDU) Inc. widens product lines. Tencent last month agreed to buy a majority stake in Los Angeles-based online-game publisher Riot Games Inc., adding to the 10 percent of Russia’s Mail.ru Group Ltd. it bought last year.

“The company can accelerate the pace of overseas investment, as it has plenty of cash,” said Jake Li, who rates Tencent a “buy” at Guotai Junan Securities in Shenzhen. “It’s essential for the company to invest in domestic operations to ensure future growth.”

Tencent rose 1.3 percent to HK$216.80 in Hong Kong trading yesterday, before the announcement, and has gained 28 percent this year. This compared with the 27 percent gain in the U.S.- traded stock of Baidu, owner of China’s most-popular Internet search engine, and the 33 percent increase in Sina Corp. (SINA), operator of the leading local micro-blogging site.

Earnings Growth

Tencent’s net income was in line with the 2.24 billion yuan average estimate of nine analysts compiled by Bloomberg. Sales rose 50 percent to 5.5 billion yuan, the Shenzhen-based company said in a statement to the Hong Kong stock exchange yesterday.

Earnings growth is “certain” to slow as costs increase with expansion, and investors should adjust their expectations, Lau said late yesterday. Tencent faces “intensifying competition” and security threats to its users, according to its statement.

Tencent gained market share from Chinese online game rivals including NetEase.com Inc. (NTES) and Shanda Games Ltd. (GAME) by promoting titles such as “Cross Fire” to the more than 600 million active users of its QQ instant-messaging service.

The company has net cash of 17.8 billion yuan, Deputy Chief Financial Officer John Lo said at the briefing yesterday.

Distribution Advantage

“The company’s advantage is in distribution, and its ability for cross-selling its various services,” Billy Leung, who rates Tencent “buy” at OSK (Asia) Securities in Hong Kong, said before the earnings. “Tencent’s focus this year will move away from games to social networking services and e-commerce.”

There were 647.6 million active user accounts for Tencent’s QQ instant-messaging service at the end of December, compared with 636.6 million three months earlier, the company said.

Sales of Internet value-added services, including online games and QQ-related subscription fees, rose 54 percent to 4.38 billion yuan, Tencent said. Online advertising sales increased 39 percent to 388.1 million yuan.

The company may explore sales of targeted online advertisements and seek investments in e-commerce, Lau said. It will also raise spending on its micro-blogging service, he said.

Tencent increased its share of China’s online games market to 29.1 percent in 2010, from 21.1 percent a year earlier, according to research company iResearch. Second-ranked NetEase.com boosted its market share to 15.3 percent from 12.5 percent, the Shanghai-based researcher said.

Tencent may list in China when Chinese regulations allow it to, Lau said.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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