March 22, 2017

Power moves

by Breakingviews

Tencent is moving up to M&A attack mode. The Chinese web giant’s revenue surged 44 percent to $6.3 billion in the fourth quarter of last year, powered by games and advertising. Fast-growing payments and cloud computing also contributed. To sustain growth, Tencent’s acquisition machine will also have to step up a level.

China’s most valuable tech company on Wednesday delivered another set of impressive results. Revenue from games such as PC favourite “League of Legends” and “Honour of Kings”, the fantasy role playing game which is a hit on smartphones, topped 18.5 billion yuan ($2.7 billion) in the three months to December. The $279 billion group is currently the world’s top mobile gaming publisher by sales, according to App Annie.

Tencent’s other businesses are also powering up. Sales of ads on Tencent’s WeChat messaging app, which now boasts 889 million active users, and its video and news sites increased 45 percent year on year. Advertising now brings in almost a fifth of total revenue. Tencent’s smaller payments and cloud computing arms also chipped in with sales that almost quadrupled year on year.

Yet keeping rivals at bay has forced Tencent to ramp up its investments and deals. Last year, it led a consortium to buy Supercell, the mobile-game maker behind “Clash of Clans”. In total, the company splashed out 71 billion yuan on investments in 2016 – more than its operating cashflow.

Though Tencent may be able to afford big bets, returns on these investments are unclear. At Supercell, for instance, revenue growth for 2016 has stalled. Tencent’s Hong-Kong listed shares are up by almost a quarter in the past three months; the company now trades at 32 times forward earnings – well above the 25 times afforded to Chinese web rival Alibaba. To justify the premium rating, Tencent will eventually need to show that its M&A credits are being spent wisely.

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