May 15, 2019 / 1:29 PM / 7 days ago

Breakingviews - Tencent deserves its premium over Alibaba

Tencent's Chief Executive Officer Pony Ma and Alibaba's Executive Chairman Jack Ma chat at the end of an event marking the 40th anniversary of China's reform and opening up at the Great Hall of the People in Beijing, China December 18, 2018. REUTERS/Jason Lee

HONG KONG (Reuters Breakingviews) - Alibaba or Tencent? The Chinese tech titans, with a combined market valuation of $900 billion, face slower growth in their respective strongholds of video games and e-commerce. Both are also fighting for dominance in financial services but, overall, Tencent has an edge that justifies a higher earnings multiple.

Both companies on Wednesday announced results that underscore the urgency to find new sources of growth. Revenue at Pony Ma’s $450 billion Tencent hit 85 billion yuan ($12.4 billion) in the three months to March, up 16% from a year earlier. That’s the slowest pace since the company went public more than a decade ago. While mobile payments, advertising and video streaming delivered impressive growth, its mainstay video-game business, which rings in a third of total revenue, has stagnated on back of tough new regulations.

The retail juggernaut led by Jack Ma (no relation) fared much better. Advertising dollars and commissions from Alibaba’s core shopping operations helped lift quarterly adjusted earnings by almost half. Even so, growth in the value of transactions recorded on the company’s local e-commerce sites slowed to 19% in the fiscal year, down from 28% the previous year.

Jack Ma is also well ahead in money matters where Alibaba affiliate, Ant Financial, owns China’s top payments app, Alipay. It also controls the world’s largest money market fund with some $170 billion in assets under management. Ant’s early success has already attracted high-profile backers, including U.S. private equity firms Warburg Pincus and Carlyle.

Markets favour Tencent, though. Its Hong Kong-listed shares are valued, on average, at 33 times forward earnings over the past two years. To compare, Alibaba’s stock, which trades in New York, were on 27 times over the same period. Trading venues play a part: a scarcity of publicly-traded tech companies in the Fragrant Harbour helps inflate valuations over those in the Big Apple.

Tencent also has a fundamental business advantage: WeChat. As of March, monthly active users on the all-in-one messaging service reached 1.1 billion. The app’s ubiquity across Chinese smartphones is helping the company catch up with its rival in mobile payments and wealth management. As a result, Tencent’s fintech revenue will account for some 30 percent of the company’s total next year, reckons David Dai, an analyst at Bernstein. That’s one up for Pony Ma.

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