Tencent: The East's Breakaway Internet Giant

BMI View: South and South East Asian markets offer great commercial potential for Chinese Internet giant, Tencent. A combination of low-cost smartphone adoption trends and the shift towards using mobile devices to access online content are helping Tencent to gain significant overseas presence with its mobile-based messaging application WeChat. That said, we see strict censorship controls and China's tense relationships with its maritime neighbours as key impediments to Tencent's regional expansion efforts.

Tencent Moves Beyond China's Borders

Tencent started its search for international opportunities since 2009. To this end, the company modified its popular applications QQ messenger and WeChat with multiple language supports in English, French, Spanish, German, Korean, Japanese and Classical Chinese to target international audiences. At the same time, the company has placed a greater emphasis on global marketing campaigns. In July 2013, for example, Tencent recruited global football phenomenon Lionel Messi to be the product ambassador for WeChat. Other branding efforts include establishing local branch offices in overseas markets such as Malaysia and India, as well as tie-ups with local firms and celebrities to bolster the firm's local presence.

Growing Smartphone Sales To Bring Mobile Internet Opportunities
Domestic Smartphone Sales (000)

BMI View: South and South East Asian markets offer great commercial potential for Chinese Internet giant, Tencent. A combination of low-cost smartphone adoption trends and the shift towards using mobile devices to access online content are helping Tencent to gain significant overseas presence with its mobile-based messaging application WeChat. That said, we see strict censorship controls and China's tense relationships with its maritime neighbours as key impediments to Tencent's regional expansion efforts.

Tencent Moves Beyond China's Borders

Tencent started its search for international opportunities since 2009. To this end, the company modified its popular applications QQ messenger and WeChat with multiple language supports in English, French, Spanish, German, Korean, Japanese and Classical Chinese to target international audiences. At the same time, the company has placed a greater emphasis on global marketing campaigns. In July 2013, for example, Tencent recruited global football phenomenon Lionel Messi to be the product ambassador for WeChat. Other branding efforts include establishing local branch offices in overseas markets such as Malaysia and India, as well as tie-ups with local firms and celebrities to bolster the firm's local presence.

Growing Smartphone Sales To Bring Mobile Internet Opportunities
Domestic Smartphone Sales (000)

Tencent's biggest overseas success to date has been establishing WeChat in India and key South East Asian markets, such as Malaysia and the Philippines. In July 2013, WeChat was the most downloaded mobile social app on application stores in the Philippines, Singapore and Thailand, according to thenextweb.com. Tencent's management reported that monthly average users (MAU) for WeChat grew by 103.6% y-o-y in Q114 to reach a subscription base of 395mn; of that figure, an estimated 15% comprised international users.

WeChat's foreign success can be attributed to two key trends. The first is the emergence of budget handset makers such as China's Xiaomi and India's Micromax, a trend that has led to rising adoption of low cost smartphones. At the same time, 3G networks are beginning to be rolled out in emerging markets such as Pakistan and Bangladesh, driving smartphone adoption even further. Between 2014 and 2018, BMI forecasts compound annual smartphone sales growth in the region of 5-15% in the key markets of India, Malaysia, Indonesia and the Philippines. We believe the strong smartphone uptake creates unparalleled demand for mobile internet services.

The second most important trend is the shift from desktop computing to mobile devices. The latter is increasingly viewed as the preferred way of accessing online content and services. The combination of mass smartphone adoption and first-time usage of mobile-based messaging applications presents an enormous opportunity for WeChat to grow its subscriber base, particularly in South and South East Asia. BMI believes these sub-regions present Tencent with the greatest commercial opportunities as their nascent smartphone markets mean that consumers' mobile behaviour has yet to be defined. This is compared with mature markets in North Asia where big companies such as Google, Facebook and Naver already dominate the mobile internet scene.

WeChat Grows, QQ International Slows

The same optimistic outlook for WeChat, however, could not be said for QQ International, Tencent's international instant messaging platform. The transition to mobile devices remains challenging and for the PC-based instant messaging portal which was launched globally in January 2009 with multiple language support. QQ International only introduced mobile access in Q413 after Tencent decided that its future lies in the mobile sector. Although mobile QQ recorded 426mn MAU in its first quarter - MAU for QQ instant messaging in Q413 was 808mn - BMI believes WeChat will continue to remain the poster child for Tencent in the international market. So far, there is little anecdotal evidence to suggest QQ international is widely adopted across Asia outside of China. As both WeChat and QQ share so much in common in terms of features and functionalities, it seems odd for Tencent to push two very similar products to the same market.

A more likely scenario, in our view, is that WeChat will continue to be developed for international audiences while QQ International is aimed more at foreign residents in China. When QQ International was first launched, Tencent had intended it to be a communication platform between Chinese and residential foreigners as popular international services such as Facebook and Twitter are not available in China. Given the amount of marketing resources Tencent spends on WeChat, it is clear the company intends for WeChat to be its international mascot.

Strict Censorship Rule Could Be Tencent's International Undoing

The biggest downside risk to Tencent's overseas venture is its strict censorship rules. It is hardly surprising that communication via WeChat is closely scrutinised by the Beijing administration, keen to keep Chinese citizens from discussing politically sensitive topics or gathering together to take on a cause. Tests conducted by blogger website TechInAsia had shown that certain inputs such as the Chinese characters for the word "Southern Weekend" - a magazine at the centre of a separate censorship controversy - were blocked when sent between users in China, Thailand, and Singapore at the height of the controversy in January 2013. When international users complained about these restrictions, Tencent reportedly referred to the problem as a 'technical glitch'. In our view, such paternalistic surveillance can be a very unwelcome development for many international users of WeChat who are used to greater freedom of speech.

To some extent, Tencent's expansion into the South East Asian markets will be hampered by the tense maritime relationships the Chinese government has with its neighbours. In the spring of 2014, the emphasis shifted from the East China Sea, where China claims the Japanese-administered Senkaku Islands (known as Diaoyu in Chinese) to the South China Sea, where China established an oil rig in waters claimed by Vietnam ( see 'Q3 2014-2015: International Crises Mask Broad Domestic Stability', June 30 2014). The standoff between China and Vietnam, in particular, led to a series of anti-China protests following by unrests and riots across Vietnam in May 2014. These political risk developments will certainly pose a major hurdle to Tencent's efforts to internationalise its services.

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