Tencent's Name Belies Its Growing Internet Empire

TAIPEI, Taiwan ( TheStreet) -- For the past decade a friend in Beijing had asked me repeatedly to sign up for the QQ chat service, one of the biggest crazes on China's Internet. "Sorry," I would say, "I already use Microsoft's ( MSFT) MSN Chat, Google's ( GOOG) Gmail chat and text messaging. Isn't that enough?"

It's not enough if you're an Internet user in China, where college students use the fast, free QQ to pick up dates in cybercafés and workers write to friends behind their bosses' backs.

So this month, after another reminder, I downloaded QQ into my smartphone. I wanted to make sure it worked before writing a column saying that QQ's provider, Tencent (TCTZF:OTC) (0700.HK) is the next craze for investors picking stocks from China.

Tencent left that impression this month when Chinese tech media said the Shenzhen-based Internet service provider would offer a list of popular games through its mobile messaging application WeChat. (Representatives of Tencent wouldn't confirm this news.)

QQ was one of Tencent's first offers after it started up in 1998, and the rack of games is just its latest. In the interim Tencent grew into China's "largest and most used" Internet service portal, according to the company's spiffy English-language Web site.

So the inaptly named company headed by its core founder, 41-year-old billionaire Pony Ma, posted a first-quarter profit of slightly more than 4 million yuan ($649.4 million), a 17.3% increase over the previous quarter and a 37.4% gain from a year before.

It's no surprise that Tencent has been described as one of its country's big three Internet firms, along with e-commerce company Alibaba and the made-for-China search engine Baidu ( BIDU).

Tencent's U.S. stock was recently trading at around $42, near its all-time high following a slump in late 2011. Its Hong Kong-listed shares recently changed hands at nearly HK$330 ($42.50), just below their all-time highs.

It's easy to see why. QQ chat claims 825 million users, more than half of China's population, with as many as 194 million active at one time. Another 128 million e-mail accounts and 81 million microblogs are registered under Tencent. Its search engine Paipai also sells ads.

Tencent's WeChat claims more than 370 million users, about 300 million of them in China. The mobile text and voice messaging offer available since January 2011 works in multiple languages for Google's Android, Apple's ( AAPL) iPhone and the Windows Phone.

The games will make more money for WeChat, Barclays says in a July 9 research note.

"We believe it is possible that Tencent could leverage its strength in social networking/communication/data mining capability to create a viral traction for its games and eventually progress towards a powerful mobile games open platform to realize one of the potential monetization models for its mobile traffic," the note says.

Synergy across Tencent platforms has helped the company grow. One platform leads to the next, with particular attention to paid services. WeChat will "act as one of several tools" to promote mobile games and other paid services, says Mark Natkin, managing director with Beijing-based market research firm Marbridge Consulting.

One such service is making payments. WeChat eventually will let users buy and pay for things as it's hooked up to the Tenpay payment platform, the consultancy said in a newsletter. It said China Unicom ( CHU) was trying out this feature for its mobile account charge services.

Tencent is all but assured growth inside China. Its early start has built name recognition to give it an edge over competitors, while the market is clearly massive and its members are getting wealthier. Tencent knows how to work with the Chinese government's rules on Internet censorship.

Back when my friend started urging me to use QQ and I declined, MSN's free instant messaging system was popular in China. It remains a common way to communicate, from inside a Beijing office where you don't want the boss to overhear some remark to across international borders where the other side is more likely to have MSN chat than QQ (which is still basically a China thing).

Microsoft surely knows all this. It has made a push into China by doing what the government there wants, first locating an "innovation center" in the unlikely province of Hainan and then working with a Chinese cloud enabler offer Windows Azure.

But aside from messaging, Microsoft's business doesn't quite overlap Tencent's, especially mobile games and payment platforms inside China. Link Link, one of the new games, is being beta tested now for Android, and Barclays expects that the company will integrate its Tenpay system into WeChat so users can press "pay" as well as "play." As long as users do both, Tencent is around to stay.

At the time of publication the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

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