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5 Key Growth Areas for Tencent Holdings

Most investors will be familiar with China’s Tencent Holdings Ltd (SEHK: 700), the social media and online gaming giant. The group just released its first-quarter 2019 (Q1 2019) earnings yesterday. In a nutshell, revenue growth disappointed but its profit number beat consensus expectations. The company also announced that it would now be establishing a new but fast-growing “FinTech and Business Services” division in its revenue breakdown, given its hefty contribution to overall revenue growth.

With that, here are five points from Tencent’s latest earnings that investors should watch closely.

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1. Smart device MAU of QQ

Tencent QQ is an instant messaging software service that provides services such as online social games, music, shopping, and micro-blogging, among other features. One key metric to track in order to assess growth for chat programmes is Monthly Average Users (MAU).

For QQ, the smart device MAU will track how many users it has which use smart devices, as this is a potential area of growth for Tencent. Though overall smart device MAU increased by just 0.9% year-on-year to 700.4 million users, the group mentioned that for young users, the MAU grew by a double-digit rate on a year-on-year basis.

2. Combined MAU of Weixin and WeChat

Weixin and WeChat are both multi-purpose messaging, social media and mobile payment apps developed by Tencent. Weixin is for China-based users while WeChat is designed for international (i.e. non-China) users but both have similar functionality. The combined MAU of these is 1.11 billion users, which climbed by 6.9% year-on-year in the latest quarter. These apps are labelled as “super apps” as they encompass many different functions within one app alone, and the growth in MAU of Weixin and WeChat should continue to be a strong driver of revenue growth for Tencent.

3. Online games revenue and new releases

Online gaming is classified under “Value-added Services” (VAS) in Tencent’s divisional breakdown. This division also includes revenue from social networks which take up 42% of the revenue of VAS, while online gaming takes up the bulk (58%).

As Tencent is the largest gaming company in the world, investors should keenly track its gaming revenue and release schedule to determine if these can continue to drive growth in the VAS division. The group has not only updated existing releases with new content but also plans to launch several mid- to hard-core games in Q2 2019. New features such as Royale and Season passes introduced into games also help to build loyalty and make players more “sticky”.

4. Fee-based VAS for music and video

Fee-based VAS subscriptions comprise video and music subscriptions that feature popular drama series in China such as Heaven Sword, Dragon Sabre and The Land of Warriors Season 2. Subscriptions rose by 13% year-on-year to 165.5 million for the quarter. Tencent Video produces short- and long-form videos that hook users into watching content produced by Tencent. This subscription-based revenue is recurring and by watching the subscription levels, investors can assess if this division is locking in more recurrent income.

5. FinTech and Business Services

This newly-disclosed business segment is driven by commercial payments, micro-loan products, and Tencent’s Cloud business. Revenue for this division was up an impressive 44% year-on-year, and this division is definitely one to watch as there is still plenty of room for rapid growth. In Hong Kong, Tencent has collaborated with partners and obtained a virtual banking license, while paying customers for its Cloud business’ has expanded. Commercial payment volume shows no signs of slowing as the monthly active merchants accepting Tencent’s mobile payment services more than doubled year-on-year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned. The Motley Fool Singapore has recommended shares of  Tencent Holdings Ltd.