Tencent (OTC: TCEH.Y) en Alibaba (NYSE: BABA), two of the largest tech companies in China, both recently posted quarterly earnings reports that beat analysts’ expectations. Tencent’s revenue and adjusted revenue rose 29% and 28%, respectively. Alibaba’s annual turnover increased by 34% as its adjusted income grew by 18%.
These impressive growth figures have not gone unnoticed: Tencent’s share has increased by more than 50% over the past 12 months, while Alibaba’s share has risen by 40%. That is one of the supplies still worth buying near its full time?
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How does Tencent make money?
Tencent generates its turnover from four main companies: online games, social networks, digital advertising, and its fintech and business services unit.
The online games unit, which generated 34% of its revenue last quarter, contains the largest video game publishing company in the world. His top games include Honor of Kings, Peacekeeper Elite, en PUBG Mobile.
The social networking unit – which includes China’s top messaging platform Weixin (known as WeChat Abroad), its social network QQ, the streaming platform for video games Huya (NYSE: HUYA), and other media services – generated 23% of Tencent’s revenue from value-added services. Weixin and WeChat’s combined monthly active users grew 6% annually to 1.21 billion.
Tencent’s online advertising segment, which generates 16% of its revenue, sells ads on Weixin / WeChat, QQ, its media platforms, and its mobile advertising network. The fintech and business services segment, which generated 26% of its revenue, houses WeChat Pay, one of the two largest payment platforms in China alongside Alipaba-backed Alibaba; and Tencent Cloud, which ranks second in the market from China’s Cloud infrastructure to Alibaba Cloud.
How does Alibaba make money?
Alibaba generates its revenue from four core businesses: its core retail segment, Alibaba Cloud, digital media and entertainment, and innovative initiatives.
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Alibaba’s core commerce unit, which generated 87% of its revenue and all of its profits last quarter, houses its Chinese e-commerce marketplaces Taobao and Tmall; their boundaries across marketplaces (AliExpress, Tmall Global, and Kaola); their company-to-business brand Alibaba.com; its Southeast Asian brand Lazada; and has Hema supermarkets. The total number of annual active consumers across its Chinese marketplaces increased in the quarter by 2% to 742 million.
Alibaba Cloud, which generates 8% of its revenue, is the largest cloud platform in Asia. The digital media and entertainment unit – which includes its streaming music and video games, mobile apps, and film production unit – generated 4% of its revenue. The segment of innovation initiatives, which produces side projects such as smart speakers and experimental apps, generated the remaining 1% of their revenue.
Which company is growing faster?
Tencent generated double-digit revenue growth over all four of its segments over the past quarter, led by a 40% jump in gaming revenue.
The fintech and business revenue up 29% as WeChat Pay, its related wealth management services, and Tencent Cloud all lock in more users. The turnover of social networks also grew 29%, as it exercised the benefits of its takeover of Huya in April, Tencent Musicthe growth in subscriptions, and robust sales of virtual items in their social network based games.
Tencent’s growth has accelerated remarkably across all its businesses except online advertising, which still generates 13% growth as older platforms want Baidu difficulty in attracting advertisers. Tencent has not provided any guidance, but analysts expect its revenue to grow 29% with 31% revenue for the full year.
Alibaba’s core revenue increased 34% annually last year as it benefited from a ‘strong recovery’ in e-commerce sales following the COVID-19 crisis, and its cloud revenue increased 59% as it became more public and hybrid skyscrapers secured. The growth of both companies accelerated from the previous quarter.
The digital media entertainment unit’s revenue increased 9%, compared to 5% growth in the previous quarter, but it included the mobile gaming business, which was previously included in its segment of innovation initiatives. That shift reduced their revenue from innovation initiatives by 6%.
Alibaba reiterated its prior guidance for at least 28% revenue growth for the full year, while analysts expect its revenue to grow 32%, with 16% revenue growth.
The ratings and potential challenges
Tencent and Alibaba earn nearly 40 and 30 times forward profits, respectively. Both ratings are cheap, but investors seem willing to pay a premium for their growing businesses and broad musts.
But both companies also have to deal with regulatory headwinds. Tencent and Alibaba are both exposed to a new U.S. Senate bill that could force Chinese companies to remove their U.S.-listed shares if they do not comply with new regulations.
Tencent’s WeChat could also be banned in the US due to national security concerns, and Alibaba’s Taobao remains on the US Trade Representative’s blacklist of “infamous” counterfeit marketplaces. But a small percentage of WeChat users are in the US, and the blacklist of retailers has yet to make a significant impact on Alibaba’s e-commerce business.
The winner: Tencent
Tencent and Alibaba are still solid long-term investments for China’s growth. However, Tencent’s better-diversified business, higher operating margins (34% vs. 23% in its most recent quarters), and stronger growth income make it a better overall investment – even though it trades at a higher multiple than Alibaba.
