Feb. 22 (Bloomberg) -- Tencent Holdings Ltd. is China’s biggest Internet company, with 430 million users. Even so, it is only No. 6 in attracting advertising because its customers are considered students and farmers without much discretionary income.
Enter the smartphone.
China’s online advertising market expanded more than 40 percent to $4.2 billion last year, according to Media Partners Asia. The industry may exceed $10 billion by 2015, it said. Tencent Chief Executive Officer Ma Huateng is wooing that money by shifting his focus from personal computers to mobile devices.
As many as 75 million smartphones will be sold in the world’s biggest Internet market this year, 29 percent more than 2011, according to JPMorgan Chase & Co., and those users are often members of China’s growing middle class.
“It’s the right strategy,” said Billy Leung, an analyst at OSK Securities in Hong Kong, who recommends buying the stock. “High-end users have the ability to spend more.”
The market agrees: Following a 7.6 percent decline in 2011, Tencent shares have jumped 26 percent in Hong Kong this year, outperforming the gains in Baidu Inc., China’s biggest search- engine company, and NetEase.com Inc., the second-biggest Chinese online games operator.
Tencent rose 1.9 percent to HK$197.20 at close today, valuing the company at HK$362.9 billion ($47 billion), more than U.S. Internet companies EBay Inc. and Yahoo! Inc.
Tencent’s QQ.com is China’s most popular website, while Sina Corp.’s Sina.com ranks third, according to data from China Websites Ranking.
Still, Sina had $101 million of ad revenue in the third quarter, compared with about $95 million for Tencent, according to earnings data reported by the companies.
“Advertisers have regarded their users as low-end,” said Dick Wei, an analyst at JPMorgan. Tencent’s websites carry fewer ads for luxury cars and prime real estate, compared with Sina, he said.
To change that, Shenzhen-based Tencent introduced its Weixin messaging service for Apple Inc.’s iPhones and devices running Google Inc.’s Android system.
A 16-gigabyte iPhone 4S costs 4,988 yuan ($792) at Apple’s online store in China, or more than double the average monthly wage in the country.
Weixin offers improved features for social networking compared with Tencent’s own Mobile QQ wireless-chat software -- important in a country where services by Facebook Inc. and Twitter Inc. are restricted by government censorship. Weixin users can receive alerts about text, voice and video messages even if they aren’t opening the application, while QQ users need to be logged on to access information.
Dundas Deng, an analyst at Guotai Junan Securities in Shenzhen, said he uses Weixin on his iPhone to locate other contacts in his vicinity. The service includes a technology that displays contacts within a user-specified geographical area that are on the network, he said. QQ has a similar feature.
“All the operators are trying to enhance the social- networking features of their service because that will help make them more sticky,” said Deng, who recommends buying the shares.
Tencent has signed up 50 million people since last year for Weixin, and that may more than triple by 2013, said JPMorgan’s Wei.
Demand for Weixin, a free service, will help drive a third of Tencent’s Internet users to access the company’s services on their mobile devices by next year, said Wei, who has an “overweight” rating on the company’s stock.
Winning users with higher incomes will help Tencent boost online advertising, said Vivek Couto, executive director at media consultants Media Partners Asia in Singapore. The per capita income of Chinese households in cities and towns has doubled in six years.
“They are making a more concerted effort to win over the higher-end demographics,” Couto said.
Tencent accounted for 4.1 percent of China’s online advertising market in the fourth quarter, according to research company Analysys International. The company ranked behind Baidu, Alibaba Group Holding Ltd., Google, Sohu.com Inc. and Sina in ad sales, according to Analysys.
“With the adoption by smartphone users with 3G data plans, Weixin is then helping Tencent to sign up a more high-end mobile user base,” Catherine Chan, a spokeswoman for Tencent, said in an e-mail.
Weixin, Mobile QQ
Weixin is the most popular social-networking application for iPhone users in China after Tencent’s Mobile QQ, according to Analysys. Tencent introduced Weixin in January 2011, 12 years after offering QQ.
“Even before Weixin, we have attracted some high-end advertisers with our young user base,” Tencent’s Chan said.
The surge in Weixin users will allow Tencent to boost e- commerce revenue through partnerships with retailers, said Qin Weijie, an analyst at PingAn Securities in Beijing.
“The location-based technology of Weixin gives it a lot of potential in mobile commerce,” said Qin, who rates the stock “strong buy.”
Offering online games, entertainment and lifestyle services to QQ users, while keeping the basic messaging service free, has helped Tencent boost revenue. Games accounted for more than half of the company’s third-quarter revenue of 7.5 billion yuan.
Tencent may also increase sales by placing advertising in mobile-phone apps accessed by Weixin users, similar to Apple’s iAd mobile advertising system, according to JPMorgan’s Wei.
Alibaba Group, China’s biggest e-commerce company, introduced its AliCloud service in July to add mobile phone users, while Baidu said in December its mobile-phone technology platform was included in a new Dell Inc. handset in China.
Spending on developing new services is putting pressure on its margins. Tencent’s third-quarter profit missed analysts’ estimates.
Earnings in the fourth quarter are estimated to grow at a slower pace. Profit may increase 15 percent to 2.52 billion yuan, according to the average of nine analysts’ estimates compiled by Bloomberg.
Weixin isn’t expected to generate revenue for the company “anytime soon,” said Jiong Shao, who rates Tencent “underperform” at Macquarie Group Ltd. in Hong Kong.
Tencent’s Weixin leads in China’s mobile instant-messaging services market, with more users than services offered by WhatsApp Inc. and Xiaomi Corp., according to JPMorgan.
“The mobile instant-messaging market is a winner-takes-all market,” Deng said. “And users tend to go for the service that their friends are using.”
--Editors: Anand Krishnamoorthy, Subramaniam Sharma
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