Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

The biggest drop in 17 months on volume almost double the 20-day moving average.

Investors are in a tizz about the prospects for Tencent Holdings Ltd. after two scathing state-media attacks and the company's own decision to rein in underage gaming. That served as an excuse to profit from the stock's big rise this year.

Take a Breather
Two scathing editorials in state media and Tencent's own decision to curb children's gaming time was an excuse to take profits on this rally
Source: Bloomberg

This, however, is not the social media company's Baidu Inc. moment. Its fellow Chinese media giant got into hot water last year over medical advertising, forcing the stock down amid panic over revenue from that sector.

As I argued at the time, Baidu's problem isn't its reliance on that one contentious category of advertisers. It's the search-engine company's broken business model of reliance on search advertising overall.

Tencent doesn't face that issue. Gaming is without a doubt the major breadwinner. Yet the company has built up a portfolio of products that makes it the country's most ubiquitous service provider.

Even if you don't play games, there's a better than 70 percent chance that if you're in China you are using a Tencent product. Notably WeChat, which has 938 million active monthly accounts.

WeChat. A Lot
Tencent's most powerful tool is the massive uptake in its addictive chatting app
Source: Bloomberg, Tencent

This means that Tencent has transformed itself from being a games maker to a full-service internet company. This ecosystem is more powerful than any one game, and far more sustainable in the long term.

Honour of Kings, the title named in the People's Daily editorials, is one of company's most important games. But WeChat is the true jewel in the crown, drawing users into the Tencent universe and, most important, keeping them there.

In the past three years, Tencent has raised advertising revenue fivefold -- quite a feat, considering that overall sales have climbed 2.5 times. And it's probably just scratching the surface in leveraging its user base and the attention it gets from consumers. Seen in that light, Tencent's forward price-earnings ratio of 36.8 might look conservative alongside Baidu's 29.4.

New Player
Tencent has steadily raised advertising's contribution to revenue as it reduces reliance on gaming
Source: Bloomberg

To date, management has held back. Wary of flooding feeds with ads that distract or annoy, WeChat's ad load is running well below its potential. Instead, the company is using the app's ubiquity to draw in more service providers -- such as bike rental companies -- in order to make the platform the only one users need.

China's government, and Tencent, may be right in showing concern about gaming addiction among young people -- who are just one slice of its player base. The metric to watch, though, is China's more entrenched addiction to Tencent itself.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net