Will Aussies Remain Underinvested In The Global Technology Growth Story?

By David Buckland | More Articles by David Buckland

One of the sectors Australian investors have trouble accessing – given the domicile of the companies – are high quality global technology businesses, and they account for a little over 30 per cent of the Montgomery Global portfolios.

In the March 2018 Quarterly reporting cycle, most of our global technology businesses exceeded expectations; not an easy feat given their average market capitalisation is US$550 billion, equivalent to 40 per cent of the entire market capitalisation of the ASX 300.

Today, I wanted to focus on Tencent (700HK), a Chinese based technology business with a US$480 billion market capitalisation and growing net cash on its balance sheet. At the current HK$395 per share, some brokers have a HK$560 (+40 per cent upside) price target on the stock.

For the March 2018 Quarter, which was released yesterday, Revenue was up 48 per cent year-on-year to Rmb73.5 billion or US$11.5 billion and this was attributable to mobile games (up 68 per cent year-on-year to Rmb21.7 billion or US$3.4 billion), payment, content subscription and social advertising. Net Earnings were up 29 per cent year-on-year to Rmb18.3 billion or US$2.9 billion.

So far in 2018, the Company has made investments in Yonghui superstores, VIPShop, Wanda Commercial, Better Life and Helian Home for US$1.9 billion to complete its new retail empire.

But the real value in Tencent is its WeChat mobile media platform. Since its launch in 2011, it has achieved very deep penetration amongst its one billion Chinese users. To say it is China’s version of Facebook or Twitter only tells half the story as it is really a fully-fledged ecosystem that offers users a range of functions. Virtually every store in China accepts WeChat Pay and nearly half of China’s rural community is now using mobile payment services such as WeChat Pay or its rival Alipay, a subsidiary of Ant Financial Service, which is controlled by Alibaba.

WeChat is used as a digital wallet; you can make instore payments; top up a mobile phone account; order goods and services; track deliveries; scan a barcode instore and then comparison shop; split a bill; reserve a table; order food; count your steps; compare your fitness with friends; prepare a CV for Western companies; and play a lot of games.

Online video gaming, or eSports, is predicted by research group Newzoo to be worth close to US$1 billion globally this year. The Chinese eSport online video gaming population is estimated at 560 million. WeChat offers some of the most popular mobile games, including Honor of Kings.

Many believe the Chinese prefer to use WeChat Group Chat over email to discuss work, to video conference calls and to transfer files. People use messaging for business purposes and the speed of communication is much faster with voice messaging, overcoming typing on a small keypad.

From 2014, WeChat offered a Red Packet function, removing the need for paper and cash.  (Traditionally, lucky red lai see packets of cash are passed around during Chinese New Year).

Instead of worrying about bandwidth and servers, an entire platform has been provided, and it is very advanced.  And with the One Belt, One Road Initiative and the dramatic increase in the number of Chinese going overseas, WeChat is becoming a super app as it is increasingly seen as an avenue through which the world can connect with China.