China’s SAMR (State Administration for Market Supervision) has definitely been active this past couple months; the recent clampdown on for-profit education was but the latest in a long list of enforcement efforts against big companies in China. From minimum wage laws to anti-monopoly fines, the market regulator has been targeting tech corporations who conduct their business with unscrupulous methods.
Although the recent crackdown wasn’t specifically targeted at Alibaba or Tencent, their stock prices still underwent turbulence as it showed the willingness of the Chinese government to overturn successful business models and sacrifice capitalism for the social good.
But this wide-spread pessimism could be a blessing in disguise; a chance to invest in these highly valued companies at a discount to their actual value. With that in mind, i’ll bring you through their business models, proprietary assets, and what their future prospects are.
Alibaba Group (HKG:9988)
Alibaba Group is a well-known Chinese tech conglomerate focused on developing, maintaining, and marketing of e-commerce platforms such as Alibaba.com, Taobao, Tmall, Aliexpress, and Lazada. The main mission of Alibaba is to make it easy to do business anywhere, by providing a full suit of e-commerce, marketing, logistics, and payment solutions for retail businesses in China and around the world.
Although the company initially focused on the building of e-commerce platforms, they have also entered other segments such as cloud computing, payments and financial services, and enterprise productivity platforms to attract more users to their ecosystem.
Alibaba has many different platforms catering to different market segments. Some of the more well-known e-commerce platforms the company owns are:
- Alibaba.com and 1688. These are B2B e-commerce platforms which cater to foreign and domestic transactions between businesses.
- Taobao, Tmall, and Aliexpress. All are e-commerce platforms facilitating transactions between either B2C or C2C. Taobao and Tmall operate predominantly in China, while Aliexpress sells globally to other countries outside of China.
- Majority stakes in Lazada and Trendyol, well-established e-commerce platforms located in Southeast Asia and Turkey.
- Owns the Freshippo high tech grocery chain, and has majority stakes in Sunart, one of China’s largest big-box and supermarket chains. Part of the company’s strategy to expand it’s new retail strategy of online and offline commerce and grocery shopping.
Apart from e-commerce platforms, Alibaba has also expanded it’s service offerings by investing in and acquiring complimentary initiatives and platforms which augment their e-commerce ecosystem. This increases participant stickiness and constantly taps on consumer trends, allowing the Alibaba ecosystem to stay relevant.
Some of the above mentioned service offerings are:
- Cainiao Smart Logistics Network and Fengniao Logistics which handles inventory management, warehousing, and deliveries for Alibaba’s e-commerce and food delivery platforms.
- Alimama marketing services and data management platform. An online marketing technology platform that offers sellers on Alibaba Group’s marketplaces online marketing services using it’s intelligence algorithms.
- Ant Group Payment and Financial Services Infrastructure. An affiliate of Alibaba Group, the company owns China’s largest digital payment platform Alipay and serves over one billion users and 80 million merchants. They are heavily involved in microfinance, providing credit to consumers and small businesses in China.
- Alibaba cloud, the largest cloud computing company in China by market share.
The company also dabbles in what it calls “innovation initiatives” such as Amap, a Chinese web mapping, navigation and location-based services provider, and Dingtalk, an enterprise communication and collaboration platform developed by Alibaba Group.
In terms of market share, Alibaba’s e-commerce platforms all hold significant market shares of their respective B2B and B2C segments, while Taobao and Tmall e-commerce platforms dominate the chinese online marketplace scene by more than 60%.
Alibaba Group has seen it’s total revenue for FY2021 surge by more than 40%, from RMB$509b in 2020 to RMB$717b in 2021. Majority of revenue is driven by it’s China commerce retail segment which includes components such as Taobao and Tmall, for a total of RMB$473b. Alibaba derives revenue from this segment mainly through marketing services and transaction fees.
It’s second largest segment is Cloud computing, which has seen demand for it’s services spike during the past year and registered 50% revenue growth for it’s services. The company generates cloud computing revenue from enterprise customers based on the duration and usage of the services
As it is, Alibaba E-commerce platforms are already entrenched within Chinese society, being utilized by consumers and businesses alike. The company also intends to build on it’s New Retail strategy, to continue to try out omni-channel retail formats to gain more market share. Alibaba Cloud is also a segment in which the management expects to see significant growth, due to the surge in data as more and more businesses embrace data and A.I in their day-to-day operations.
With a wide range of proprietary e-commerce platforms to cater to consumer’s preferences and needs, as well as other services which play a vital supporting role in attracting and retaining customers, Alibaba Group looks set to continue it’s growth trajectory in the future.
Tencent Holdings (HKG:0700)
Tencent Holdings is another prominent Chinese tech conglomerate which dominates in instant messaging and social media platforms, as well as mobile and PC games. Like Alibaba, Tencent also has interests in online advertising, fintech, and cloud computing. The company is based in Shenzhen, China, and is a direct competitor to Alibaba in many areas.
The company originally derived income solely from advertising and premium users of it’s messenger app QQ, but over the years following it’s founding, started venturing into online games and also into game licensing and selling of virtual goods.
Tencent Holdings is most well-known for it’s products in the social media and gaming segments. Apart from these segments, Tencent also owns various other ventures in areas such as music, live-streaming, e-commerce, and cloud computing. Of these, the more commonly known ones are:
- Wechat and QQ, social media and messaging platforms which are in use throughout China for messaging, gaming, social media, and mobile payments, among other uses.
- Highly successful games such as Honour Of Kings, League Of Legends, Moonlight Blade, and Peacekeeper Elite, the Chinese equivalent of PUBG. The company’s games cover various genres such as MOBA, shooter, and MMORPG.
- Owns the majority of Tencent Music, the conglomerate’s holding company for the music-streaming apps it owns. These include music-streaming apps such as QQ Music, Kuwo, Kugou, and Wesing, a popular karaoke social community app. Tencent Music dominates the Chinese market in terms of monthly active users of music-streaming apps.
- Tencent Cloud, the company’s cloud computing arm which provides a wide range of solutions across multiple industries. Tencent Cloud has been constantly increasing it’s data centre count and availability coverage, and sees more demand for cloud services and infrastructure.
Tencent also has different business units involved in areas such as Film-making, Real-estate brokerage, healthcare, and enterprise services.
Tencent is also well-known for having an aggressive investment mandate and has various stakes in many other highly valued public companies. This strategy helps to provide them with other sources of income. Some of the more notable ones are:
- Stakes in e-commerce companies such as JD.com (17%), which is China’s second largest e-commerce player after Alibaba, and also SEA Limited (22.9%), a major e-commerce player in Southeast Asia through it’s platform, Shopee.
- Major and minor stakes in numerous other game developers such as Riot Games, Activision Blizzard, Ubisoft, Supercell, and Kakao.
- Stakes in social media companies such as Snapchat (12%) and Kuaishou (21.6%), as well as in gaming live-streaming platforms like Huya (50.8%) and Douyu (38%) which compliment their gaming segments.
- Seemingly unrelated businesses like EV manufacturers, Tesla (5%) and Nio (12.7%).
It’s interesting to note that Tencent Holdings generally prefers to invest in e-commerce, gaming, and social media related businesses, as well as other technology companies to expand their conglomerate. This might be an attractive point for would-be investors to note.
Tencent’s super app Wechat has been constantly growing it’s MAU annually, reaching a record high of 1241.6 million users in 2021. The company’s track record of developing multiple extremely popular and lucrative game titles such as Honour Of Kings, and Peacekeeper Elite have also proven that they have the experience and capability to continue to churn out desirable games to keep players engaged.
Through it’s business units, Tencent has managed to achieve more than 200% growth in total revenues over the past five years. The company has benefited greatly from the demand for it’s mobile games segment, as well as it’s Fintech and business services. Total gross and net profits have also been growing, with Tencent’s net profit margins reaching a new high of 33% during 2020.
The conglomerate derives most of it’s revenue (55%) from Value added services, which achieved more than 30% revenue growth from 2019. This segment includes revenue from their smartphone games and social media platforms. Another major segment is Fintech and business services (27%), growing 28% from 2019. This segment comprises the company’s commercial payment, wealth management and Cloud Services fee revenue.
With their super app Wechat, or otherwise known as Weixin holding a dominant and advantaged position in China, Tencent would be able to leverage and exploit synergies between their different platforms to drive impression volume and revenue growth. They can also tag onto their different platforms to conduct marketing and mass market product intros, thereby enabling lower selling and distribution costs, while achieving better outcomes.
Even in periods in which their main revenue segments experience a slowdown in growth, the company also has a huge portfolio of attractive and fast-growing companies to fall-back on, therefore giving this Globalized tech conglomerate great resilience in the face of adversity.
It’s hard to argue against such a well-positioned and attractive business model, with super apps and social media platforms with high retention and engagement. As long as Tencent Holdings is able to expand it’s ecosystem and attract more users, the company should be able to capitalize on it’s position to retain or even increase it’s market share while expanding into other high-growth areas.