China’s Tencent Faces Obstacles Marketing WeChat Abroad; Provenance Could Put Off Users Who Fear Reach of Beijing’s Censors

August 18, 2013 Leave a comment

August 16, 2013, 4:30 a.m. ET

China’s Tencent Faces Obstacles Marketing WeChat Abroad

Provenance Could Put Off Users Who Fear Reach of Beijing’s Censors

AARON BACK

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China’s Internet is a world unto itself, where foreign players are kept out by censors and a few large domestic companies wrestle for control. Now giant Tencent HoldingsTCEHY +0.86% is trying to expand abroad. Tencent plans to spend up to $200 million this year to advertise its mobile messaging service WeChat in emerging markets like Southeast Asia and Latin America. The company claims a total of 235.8 million monthly active users globally and says it already has more than 100 million registered users outside China, though it doesn’t disclose the number of active users overseas.

Breaking out beyond China in a meaningful way won’t be easy. For starters, WeChat faces stiff competition abroad. U.S.-based messaging service WhatsApp claims 300 million monthly active users worldwide—as of June, more than 90% of iPhone owners in some Latin American and European countries, as well as in Hong Kong, were active WhatsApp users, according to research firm Onavo Insights. Japanese messaging service Line and Korea’s KakaoTalk are also pushing beyond their home markets.

WeChat might have an edge in markets like Taiwan and Hong Kong, where the connection to mainland China is strong. Beyond those locations, though, WeChat’s Chinese provenance could be a concern. The sway of Beijing’s censors could put off international users who fear the prospect of having their WeChat messages blocked or intercepted if they touch sensitive issues.

Tencent can afford to speculate to accumulate overseas users. The company had around $2.4 billion in cash as of June 30. Still, $200 million is hardly chump change for Tencent. Earnings missed analyst expectations in the second quarter due to a surge in marketing expenses, which more than doubled from a year earlier. Operating margins fell to 31.7% from 37.4% a year earlier.

Even if Tencent succeeds in picking up WeChat users abroad, converting them into profits won’t be easy. The company has only just started to try monetizing WeChat by releasing games and smiley-face icons that users can buy through the messaging platform. Barclays estimates that WeChat will contribute about 4% of Tencent’s revenue next year.

Meanwhile, domestic competition can’t be ignored. Sina Corp.’s SINA +0.98% micro-blog service Weibo boasts more than 50 million active users per day, is ahead of WeChat in monetization, and recently signed a deal with dominant e-commerce player Alibaba Group for merchants to promote their wares on Weibo.

Tencent has gumption to venture outside the walled garden of the Chinese Internet. But it might be better off spending its cash fending with rivals at home.

Filed under TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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