Tencent Plans Share Split With Earnings Missing Estimates

Tencent Holdings Ltd., the best performer in Hong Kong’s benchmark index since its 2004 listing, plans a share split to boost holdings by individuals after earnings missed estimates on higher costs for its WeChat app.

Investors will get five shares for each one they already own, Tencent said in a filing yesterday. The company earlier posted fourth-quarter net income of 3.91 billion yuan ($631 million), missing the 4.1 billion-yuan average of 17 analyst estimates compiled by Bloomberg. The stock fell 1.7 percent.

Tencent’s long-term performance in a market where investors have to buy the stock in multiples of 100 has made it harder to attract individuals as rival Alibaba Group Holding Ltd. prepares for a U.S. initial public offering. Chairman Ma Huateng is counting on the popularity of the WeChat messaging service, which has 355 million monthly active users, to win a greater share of China’s Internet market from Alibaba and Baidu Inc.

“Tencent’s value is quite high, so splitting the shares would lower the entry barrier for investors,” said Ricky Lai, an analyst at Guotai Junan International Holdings in Hong Kong. “This is good for the company. It means more individual investors will be willing to invest in the stock.”

The split is subject to approval by shareholders of the Shenzhen-based company at its annual general meeting, it said.

Tencent’s June 2004 initial public offering raised HK$1.55 billion selling stock at HK$3.70 apiece. The shares closed at HK$558 in Hong Kong.

Marketing Costs

The company is trying to capture the consumer shift to mobile devices as it adds new games and services to WeChat, known as Weixin in China, to draw revenue from the free message application.

Revenue in the fourth quarter rose 40 percent from a year earlier to 17 billion yuan. Selling and marketing expenses surged 39 percent from the September quarter as the company pushed its e-commerce, WeChat and game platforms.

“It’s part of their aggressive plan to grow the WeChat platform,” said Stephen Yang, an analyst at Sun Hung Kai Financial Ltd. in Hong Kong. “This is a pivotal time in mobile and they want to get ahead of the curve and attract eyeballs.”

More than 84 percent of China’s Internet users regularly access instant messaging, including Tencent’s QQ, making it the most popular online app in the country, followed by search engines with about 80 percent usage, according to data compiled by Bloomberg.

WhatsApp, Viber

Tencent plans to buy new content and improve services for its online video business, increase WeChat marketing outside China and boost demand for its payment services.

“In the PC Internet age, everything we did revolved around QQ,” Ma, China’s richest person according to the Bloomberg Billionaires Index, told reporters yesterday. “Now, in the mobile age, we have one more foot, which is Weixin, and all our business will be built around it.”

QQ’s monthly active users reached 808 million by Dec. 31. Games provided through QQ’s mobile app and WeChat generated 600 million yuan of sales in the fourth quarter. WeChat has more than 2 million official accounts, Tencent President Martin Lau said yesterday.

Six of Tencent’s mobile games each have more than 10 million daily active users, Ma said.

Recent deals have highlighted the potential value of WeChat. Facebook Inc. agreed to pay as much as $19 billion for message service WhatsApp Inc., which has 450 million users. Rakuten Inc. agreed to buy message and calling app Viber for $900 million.

Alibaba IPO

WeChat may be worth as much as $64 billion given the potential for the service to be monetized, Elinor Leung, an analyst at CLSA Ltd., said in a March 10 report.

Competition among Internet companies is heating up as Alibaba kicked off the process for an initial public offering in the U.S. on March 16.

China’s biggest e-commerce company may sell about a 12 percent stake in itself, according to a person with knowledge of the matter, making it an $18.4 billion offering based on the $153 billion average valuation of analysts, according to data compiled by Bloomberg. Tencent’s market value is $134 billion.

Chinese Internet companies led by Alibaba and Tencent have announced 48 acquisitions and investments with a value of $19.7 billion since 2012, according to data compiled by Bloomberg.

Virtual Cards

Earlier this month, Tencent agreed to buy a 15 percent stake in Chinese e-commerce website JD.com Inc. and transfer some of its own assets to build a stronger competitor to Alibaba. In February, it acquired 20 percent in Dianping, the operator of a Yelp-like website in China, to strengthen location-based services.

“The e-commerce is going good and the cooperation with JD.com will bring good news in coming quarters,” said You Na, an analyst at ICBC International Research Ltd. in Hong Kong. “The cost growth was driven by their e-commerce investment.”

Tencent’s investment platform Licaitong attracted 60 billion yuan of assets under management in two months, Lau said.

More than 400 million yuan was collected in nine days on WeChat’s red packets services, which allow users to send each other money through the app, he said.

While Tencent has been expanding its online financing, the move has come up against a regulatory challenge. China’s central bank last week blocked plans by Tencent and Alibaba to offer virtual credit cards as the government tried to tighten restrictions on online financial products.

The People’s Bank of China also suspended the use of Quick Response codes for payment purposes. QR codes have been a popular feature on WeChat as part of Tencent’s push for more commercial applications for the service such as allowing users to buy game services and investment products.

With regulatory risks pending, investor concerns on WeChat’s monetization potential could affect the company’s shares in the near term, Alicia Yap, an analyst at Barclays Plc in Hong Kong, said in a March 17 research report.

The company also announced the resignation of director Zhang Zhidong, a co-founder and its chief technology officer. Zhang will take a role with the Tencent Academy focusing on employee training.

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