China’s Tencent, the social media platform, has been a popular in portfolios invested in the region. For funds available for sale in Asia, including ETFs, 97 products have a 5% or more allocation to Tencent while only 27 have a 5% or more exposure to Facebook, according to FE data.
The largest Tencent holding for an active fund is the BOCHK China Equity Fund, which has a 10.3% allocation.
Syme, co-manager of the JOHCM Global Emerging Markets Opportunities Fund, has “significant exposure” to Tencent, though according to the fund factsheet dated 30 June, it is not among the top ten holdings.
In a recent research note, he zeroed in on a comparison between Facebook and Tencent. Both are social media platforms expanding into related businesses and “continue to grow rapidly despite their enormous size”.
| Tencent | ||
| Monthly active users | 1.65bn | 900m |
| Revenues | $5.4bn | $5bn |
| Income from operation | $2bn | $2bn |
Data from Q1 2016. Source: JO Hambro
He pointed out the difference in revenue streams of the two giants. Advertising accounted for $5.2bn of Facebooks $5.4bn in revenues. Tencent’s revenue was from online games ($2.6bn) social networking fees ($1.2bn) and only $720m in advertising.
“The great achievement of Tencent is in persuading users to pay the company directly for services (such as digital content subscription services, membership subscription services and virtual item sales), something that Facebook has yet to achieve.
“Tencent is only just beginning to grow advertising revenues and has huge growth opportunities that Facebook does not,“ Syme wrote.
He omitted the fact that Facebook has been denied permission to operate in China, the world’s largest potential user base. That indeed creates a competitive advantage that allows Tencent to thrive at home.
However, the disadvantage of being a market leader at home is becoming clear. Tencent’s reliance on domestic consumer spending at a time when China’s GDP growth slows makes the case for increasing revenues globally. Yet the lack of strong global competition could make the company ill-prepared for international expansion.
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The JOHCM Global Emerging Markets Opportunities Fund vs its benchmark, the MSCI Emerging Markets Index, in US dollars, over the trailing three years:
