Tencent Q1 16A – Search for happiness.

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Tencent needs to do a little better to keep everyone happy.

• Tencent reported very healthy Q1 16A results as business continued to benefit from user growth in China that is now substantially outstripping a stagnant device market.
• Q1 16A revenues / adj-EPS were RMB32.0bn / RMB1.06 nicely ahead of consensus at RMB30.3bn / RMB1.02.
• Tencent’s mobile based ecosystem grew to 762m users well ahead of RFM’s estimate of 718m which sets the company up well to continue its path of revenue growth.
• Despite the excellent results, the inevitable impact of the slower Chinese macro environment weighed on sentiment as management was quite cautious about the outlook.
• Furthermore, Tencent was at pains to point out that there is a limit to the degree which news feeds, games, chat and video can be loaded up with advertising before the user experience suffers materially.
• This put a crimp on some of the markets hopes for 2016 performance which combined with the shares’ already high valuation has triggered a small correction.
• There is no doubt that Tencent is extremely well positioned in the Chinese market.
• It has very good coverage of the Digital Life pie and dominates Instant Messaging which is one of the most important segments.
• However, the vast majority of its revenues come from selling content which I think will be limited when it comes to long-term growth.
• This means that Tencent needs to really focus on monetising the traffic, usage and data that it accumulates which is where it needs to do a lot of work.
• This is where Tencent really needs to understand the principles behind building a thriving ecosystem and I think there is still work to do here.
• Success in the ecosystem will show in the online advertising business which grew nicely in Q1 16A but given the scale of its Digital Life coverage and the valuation of the shares, it should have grown faster.
• The outlook for 2016 is good but relative to what commentators are hoping for and what investors are paying for it needs to do a little bit better.