China's Tencent Becomes an Investment Powerhouse, Using Deals to Expand Its Empire

By Quentin Webb and Jing Yang

A tech-market boom has yielded huge gains for China's Tencent Holdings Ltd., which has invested in hundreds of up-and-coming businesses and is now sitting on a portfolio worth roughly a quarter of a trillion dollars.

Tencent is best known for WeChat, its ubiquitous do-everything app in China, and is the world's largest videogame company by revenue, with hits such as "League of Legends" and "Honor of Kings." Listed in Hong Kong, Tencent's own stock has been driven up by the strong performance of its core activities, as the coronavirus pandemic sped up the adoption of digital services in China. Its market capitalization is now close to $900 billion, making it China's most valuable company.

The company has also bet extensively on Chinese and overseas startups in areas such as gaming, social media, entertainment and electric vehicles. That strategy has paid off handsomely as investors have bid up stocks in fast-growing tech companies and lapped up initial public offerings.

"I half-seriously call it China's best venture-capital fund," said Robin Zhu, an analyst at Sanford C. Bernstein. His team estimates that Tencent's listed and unlisted investments were worth some $259 billion in total as of March 2.

Tencent's last earnings report, released in November, said its investments in listed companies, excluding its subsidiaries, were worth the equivalent of $138 billion as of end-September 2020. That was nearly 10 times the figure it reported just four years earlier.

To be sure, most of Tencent's gains are on paper only, and would be reduced by any selloff that hits internet stocks or China-focused companies. Many technology stocks, which have jumped in value during the coronavirus pandemic, have pared some gains recently.

Backing newer outfits has long been an integral part of Tencent's strategy. "We manage our investment portfolio with a primary objective to strengthen our leading position in core businesses," the company's annual report said. The investments also fit with Tencent's strategy of connecting people to content and services, it added.

As a large corporation, Tencent has a bigger war chest and a longer investment horizon than a typical venture-capital investor, said Min Lin, a founding partner at NewQuest Capital Partners, a firm that provides liquidity solutions to investors in private-equity funds.

"Tencent's investment team maintains a low profile. Nonetheless, everyone knows they are the 800-pound gorilla in the room," said Ms. Lin. She said startups could benefit from being part of the Tencent ecosystem.

Some companies with Tencent's backing have been known to use WeChat to promote themselves and reach more customers. Meituan, which went public in 2018 and now ranks among China's largest listed companies, has several popular mini-programs that are integrated into WeChat, allowing users to order and pay for food delivery and other services.

At New York-listed Pinduoduo Inc., traffic from WeChat users has helped power the rapid expansion of the retailer in an e-commerce market dominated by established players such as Alibaba Group Holding Ltd.

Conversely, major rivals of Tencent have been largely shut out from WeChat's ecosystem. The one billion-plus users of WeChat and its domestic sister app, Weixin, can't easily share links to Alibaba's e-commerce platforms and to short videos on Bytedance Ltd.'s Douyin, the Chinese version of TikTok. For its part, Alibaba doesn't accept payments via Tencent's WeChat Pay on its e-commerce sites.

A Tencent spokesperson said WeChat and Weixin have "long-established policies aimed at protecting user experience."

China's top commerce regulator has been scrutinizing anticompetitive behavior at the country's technology giants, and Douyin recently complained in a civil lawsuit against Tencent that WeChat's blocking of its links constituted monopolistic behavior. Tencent said it follows the principles of "fair competition and open platform cooperation," and called ByteDance's allegations groundless. Representatives from ByteDance didn't respond to requests for comment.

Tencent, founded and run by billionaire entrepreneur Pony Ma, has previously encountered regulatory hiccups in China over videogame approvals, and could be drawn into a broader crackdown as Beijing seeks to rein in the market power of the country's technology giants.

Recently, a Tencent executive was held by Chinese authorities as part of a corruption probe involving a former government official, The Wall Street Journal reported. Still, analysts and investors generally see Tencent as less exposed to such risk than Alibaba and its affiliate Ant Group Co. since it isn't directly involved in e-commerce--a major focus of regulators currently--and it has been less aggressive in pushing into financial businesses such as consumer lending.

Tencent's chief rival Alibaba also has stakes in dozens of startups and listed technology companies, though in contrast to Tencent, it tends to prefer taking controlling stakes in businesses. Excluding Ant, the rest of Alibaba's investment portfolio is worth roughly $26 billion as of March 2, according to Bernstein estimates.

Last month, Kuaishou Technology, the startup behind another popular Chinese video app, became the latest Tencent investment to go public. Kuaishou's stock more than doubled on its first day of trading in Hong Kong.

As of Tuesday's close, Kuaishou was worth roughly $171 billion, with Tencent's stake valued at about $30 billion--or more than 12 times its total outlay. Tencent first invested in Kuaishou in July 2014, when the startup was valued at just $61 million, before counting the new money, and increased its investment in Kuaishou's subsequent fundraising rounds.

In China's venture-capital industry, Tencent is known as a prolific investor that casts a wide net across the startup scene, rarely missing out on emerging trends. Deal making is overseen by President Martin Lau, a former Goldman Sachs Group Inc. banker who heads the board's investment committee.

In January last year, Mr. Lau told a gathering of portfolio companies that investment was one of Tencent's core strategies, and that it had invested in more than 800 companies. PitchBook, a data provider, says the company has made 327 investments, while its corporate venture-capital arm, the Tencent Industry Win-Win Fund, has made 439. Both entities rank among the 10 most active corporate venture investors globally, according to PitchBook.

Notable investments also include online retailer JD.com Inc. and electric-vehicle manufacturer NIO Inc., as well as non-Chinese companies such as videogame maker Activision Blizzard Inc. and social-media company Snap Inc.

Sometimes Tencent executives serve as directors, or investments are described as forming part of broader partnerships. In other cases, investments appear to be passive minority shareholdings, where Tencent doesn't have board representation or seek to influence investees' corporate strategies.

Investee companies could also benefit by association, rather like U.S. firms might get a boost if Warren Buffett's Berkshire Hathaway Inc. bought a stake, said Dan Baker, senior equity analyst at Morningstar. "Once Tencent invests in something...it's like a stamp of approval in the Chinese tech space," he said.

If markets stay receptive, more Tencent-supported groups will probably go public, such as Didi Chuxing, China's answer to Uber Technologies Inc.

Stephanie Yang contributed to this article.

Write to Quentin Webb at [e-mail] and Jing Yang at [e-mail]

(END) Dow Jones Newswires

03-03-21 0620ET