China’s Tencent Steps Up Wager on 58.com After Selloff

Tencent Holdings Ltd., China’s second-biggest Internet company, is ramping up its bet on 58.com after a selloff wiped out a third of the company’s market value last quarter.

Three months after purchasing a 19.9 percent stake in the Beijing-based company, Tencent scooped up $117 million more of 58.com’s American depositary shares in the secondary market from Sept. 22 to Sept. 29, boosting its stake to 24.6 percent in the process, according to an Oct. 2 filing with the Securities and Exchange Commission. Shares in 58.com, a Craigslist-like site, tumbled 31 percent in the third quarter, the fourth-worst performance in a Bloomberg index of 79 Chinese companies listed in the U.S.

About $1.4 billion of the company’s market value was erased in the period as growing competition in the online classifieds sector prompted 58.com to give a revenue forecast that was below estimates. The company remains an attractive target to Tencent, the leading Chinese provider of instant-messaging services, as it seeks to compete with rivals including Alibaba Group Holding Ltd. for online consumers, according to Praveen Menon, an analyst with Bloomberg Intelligence in New York.

58.com “is facing increased competition from not just big diversified portals but also from specific verticals websites such as SouFun,” Menon said, referring to China’s biggest real-estate website. “For Tencent, it gives them a stake into the local advertising business, a lucrative segment that it can cross-promote through its mobile properties.”

Forecasts Disappoint

Tencent press official Canny Lo declined to comment on the company’s stake in 58.com.

While 58.com on Aug. 20 reported better-than-estimated sales and net income for the second quarter, the company’s shares fell as much as 10 percent the next day after it forecast third-quarter revenue of $66 million to $68 million, below analysts’ estimates of about $75 million for the period.

Chief Executive Officer Michael Yao told investors on 58.com’s earnings call that plans to ramp up spending on advertising and research and development may fuel losses in the second half as the company seeks to lure more mobile users.

The company made more than 50 percent of its $112.8 million in first half revenue from membership fees, while about 44 percent came from extra marketing services such as priority listings.

‘Strategic Investment’

Tencent, second only to Alibaba among Chinese Internet companies by market value, bought its original 19.9 percent position in 58.com for for $736 million in June, or $40 per ADR. 58.com surged to as high as $55.35 after the acquisition, before falling to as low as $34.78 on Sept. 22, when Tencent began adding to its stake. 58.com fell 0.7 percent today to $35.35 at 9:41 a.m.

Shenzhen, China-based Tencent said in June that the investment would allow it to expand the selection of local services and merchants available to users on its platforms, including the WeChat and QQ instant messaging applications.

“Tencent is under pressure to buy more companies as Alibaba speeds up the game,” Tan Chiheng, a Boston-based analyst at Granite Capital Inc., said in a telephone interview. “For Tencent, these are long-term investments. Tencent doesn’t care much about short-period market moves of these companies.”

Tencent acquired a 15 percent stake in JD.com Inc., China’s second-largest e-commerce operator, in March, and bought additional shares when the company went public in May. Tencent held a 17.4 percent equity interest in JD.com as of June, according to its Aug. 25 semi-annual report.

Tencent’s growing stake in 58.com is positive for shareholders, according to Cheng Cheng, an analyst at Pacific Crest Securities LLC in Portland, Oregon.

“It looks like they are taking only minority interests at this point,” Cheng said in a telephone interview. “Maybe that will shift as they get more comfortable with the partnership.”

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