Taking full control of a ‘Legend’

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FATPROPHETS: Chinese Internet giant Tencent Holdings (HK: 0700, entry price HK$145.20) has a growing number of strings in its bow with which to generate revenue, with advertising and online payments on the ascent. We hold Tencent in the Global Opportunities portfolio.

The company’s advertising business is growing at pace and put in another strong quarter of growth in 3Q15, with online advertising revenues again doubling year on year for the second consecutive quarter. Online advertising revenue of RMB 4.938 billion was up 102% compared to the year ago quarter, as performance-based advertising revenues grew by 160% year over year to RMB 2.386 billion, reflecting higher contributions from social advertising on mobile.

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Tencent has also been bulking up its offline-to-online (O2O) to business and although no figures have been broken out discretely just yet, the company noted in its most recent quarter commentary that there has been “rapid growth in users binding their bank cards to their Weixin Pay or QQ Wallet accounts.” According to the company, the aggregate number of Weixin Pay and QQ Wallet accounts bound to bankcards exceeded 200 million in September 2015.

Still, Tencent’s Golden Goose is gaming, and the company is continuing to expand its reach in the gaming industry, both at home and internationally. Just prior to Christmas, Riot Games, the gaming company behind League of Legends announced on its website that Tencent had moved from being a majority shareholder to full ownership.

The financial terms weren’t disclosed, but Tencent has been building its equity stake in Riot Games since it took a majority stake in the LA-based developer in 2011.

League of Legends is the dominant game in the multiplayer online battle arena (MOBA) genre and is one of the most popular video games in the world. It has been a while since statistics were provided by Riot Games, but as of the beginning of 2014, the game had an astonishing 27 million players daily, concurrent players peaking at around 7.5 million and 67 million players playing the game every month.

With eSports on the rise, the League of Legends world championship prize pool has grown into the millions over the past couple of years.

Legends employs a free-to-play model that has been widely praised, sourcing revenue from micro-transactions, but hasn’t alienated its core player base by becoming a “pay-to-win” game. The company has continued to gather feedback from players so as to ensure the right balance between its many different characters and special abilities, pitting two teams of five players against one another.

Through the sale of virtual items, the game is thought to be one of the biggest grossing games worldwide by industry observers. Last year it was estimated the game was generating monthly revenue of US$100 million or more.

Should that figure be in the right ballpark, it’s a core earner for Tencent, helping it maintain its position as the world’s biggest gaming company in 1H15.

In the third quarter of 2015, Tencent online games revenues increased 27% year on year to RMB 14.33 billion, representing an increase in pace from the 17% year on year growth reported in 2Q15.

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