Tencent owns two of the largest social networks in China: Weixin (WeChat is the international version) and QQ. Weixin, with 1.2 billion users (out of a total China population of 1.4 billion), is far and away the most important social network in China with consumers using its “everything app” for instant messaging, social media, mobile payments, shopping, video gaming, and more. It benefits from two-sided network effects that connect users with advertisers, stores, gaming companies, influencers, and a whole host of other parties that want access to Weixin’s massive user base. It also benefits from an app-store-like network effect that connects users with third parties who have created mini-apps1 for use within the Weixin app. QQ, with 600 million monthly active users,2 is in many ways the predecessor to Weixin, providing many similar functions but in a desktop-centric format.3 Tencent has used its prodigious cash flows from its social networks to fund an extremely successful venture capital portfolio that includes stakes in some of the most exciting businesses in the world including Meituan (the largest food delivery service in China), Sea Ltd (the largest gaming and e-commerce platform in Southeast Asia), JD.com (the second-largest e-commerce company in China), and many more. Part of the reason for Tencent’s high hit rate is because the company can exchange access to and information on its billion-plus user base for ownership stakes in young and promising apps, which is very reminiscent of the early cable pioneer John Malone who exchanged his cable company’s access to millions of households for early stakes in Discovery, QVC, BET, CNN, and numerous other channels. Lastly, Tencent is the third largest cloud services provider in China behind Alibaba and Huawei. 4 As a result of Tencent’s unrivaled network of Chinese users, we believe the company is in a great position to benefit from the growth in China’s GDP and the secular trend toward digital advertising, e-commerce, payments, and cloud computing, all of which are underpenetrated. Moreover, because network value rises exponentially as new participants join a network, we believe Tencent is likely to maintain or even increase its pricing power over time.
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