2023-04-09 07:02:17 ET
Summary
- Livestream e-commerce is booming in China as the market is growing at close to 40% annually.
- Tencent is rapidly making inroads in this market as it deepens engagement with its strong user base in China's leading messaging and social media app.
- Tencent's advertising ROI is outperforming China's incumbent livestreaming companies, giving confidence in market share gains.
- Conservative application of two different valuation routes imply an upside of more than 60%.
Thesis
In China, commerce is not a dessert. It’s become the main course.
This quote rings true again as China leads the world in the new wave of e-commerce advertising, marketing and spending: livestream e-commerce. This has been a major trend in China for a few years now, but as of late, Tencent ( TCEHY ) ( TCTZF ) is a new kid on the block that is leveraging its leading 59% market share position in social media and messaging app WeChat to rapidly growing with superior engagement metrics than incumbent players. A conservative valuation of Tencent using 2 different approaches both yield more than 60% upside in the stock.
What is livestream e-commerce?
Livestream e-commerce uses live video streaming by popular hosts or influencers to showcase and sell products in an entertaining way. It involves a high degree of interaction in real-time as viewers can ask questions, receive feedback, gauge popularity and demand, and make purchases seamlessly while watching the livestream. Ultimately, this creates a much more engaging and interactive shopping experience, resulting in 30% higher sales conversions.
Why is livestream e-commerce big in China?
China's has a $519 billion livestreaming e-commerce market that is growing rapidly. In FY23, according to Statista and Chinese technology news website 199 IT, it is expected to grow further by almost 40% to $723 billion:
China Livestreaming Ecommerce Market Size (Statista, Author's Analysis)
With this high growth, livestreaming e-commerce's contribution to overall online shopping spends is increasing rapidly:
Livestream Ecommerce as % of China Online Shopping Spends (iResearch, Author's Analysis)
This is driven primarily by increased viewership :
% of Internet Users Who Watched Livestreaming Ecommerce in China (CNNIC, Author's Analysis)
China is ahead of the rest of the world in this mode of e-commerce. A key reason for this is that China's online consumer app market consists of a super apps that integrate multiple functions in a shopping consumer experience to provide consumers with one, seamless shopping experience; from integration of digital payments, ads and content distribution via social media to logistics companies for delivery. Indeed, watching shopping related live-streaming videos is part of daily life in China, particularly in Tier 1 and Tier 2 cities. According to Statista :
A majority of Chinese consumers stream live shopping shows at least once a week , some even every day, mostly in the evenings and on weekends. Half of the viewers make purchases at least once a month.
- Author's bolded emphasis
According to data from Topklout, referenced from Statista, the Chinese consumer market has moved to a stage where live streaming e-commerce commands the highest purchase conversion rates by a mile:
Purchase Conversion Rates of E-Commerce Marketing Methods in China (Statista, Topklout, Author's Analysis)
Here's an example of one of the most popular live-streaming e-commerce videos where 15,000 units of lipstick was sold in just 5 minutes by a leading Chinese influencer.
I believe the advent of 5G, VR and AI will only accelerate the live-streaming e-commerce boom.
Tencent is a great way to play China's livestream e-commerce boom
Tencent's advertising business makes up 17% of overall revenues. This is the part that has been the stand-out performer over the last 2 quarters:
Tencent Online Advertising Revenue Growth YoY (Company Filings, Author's Analysis)
On a YoY basis, Tencent's online advertising business broke its slow growth streak and posted a sharp revenue growth recovery of 15% YoY. The transition to positive growth momentum is even more apparent when we look at the quarterly trends:
Tencent Online Advertising Revenue Growth QoQ (Company Filings, Author's Analysis)
After 6 quarters of rather tepid growth amid a weak ad-spend environment , Tencent has recovered sharply to post 15% QoQ growth for 2 consecutive quarters now. Note that Q4 FY22's sequential growth is more meaningful as that is off a higher growth base than Q3 FY22.
What is driving this growth in Tencent's advertising revenues?
Short form live-streaming e-commerce content is the key driver. Tencent has this thing called Video Accounts that sit within WeChat, which is the country's most popular messaging and social media app.
Video Accounts let individuals and businesses share short videos and live-streaming. Much like YouTube Shorts, but geared a lot more towards the shopping experience whilst still being entertaining (they have to be to drive sales conversion).
Tencent's advertising recovery was mostly driven by strong activity in video accounts' in-feed ads , which now make up more than 4% of total online advertising revenues and barely 0.7% of overall revenues. Engagement metrics are rapidly improving along this channel. For example, 190 million people (14% of China's population) watched the Chinese new year variety show (called CCTV spring festival gala ) via Tencent's live-streaming platforms.
During a recent Weixin (WeChat) Open Class 2023 event, Tencent shared very promising growth stats on its livestream e-commerce segment; in 2022, the gross value of purchases ((GMV)) multiplied by 9x in 2022 and the number of revenue-generating content creators 2x'ed. User engagement in the WeChat apps platform called Mini Programs also improved with monthly user time spent doubling over the year and GMV increasing 40% YoY.
These are impressive growth metrics. The quality of engagement also seems to be superior as evidenced by higher revenue per ad impressions:
...revenue per 1,000 impressions that we achieved on Video Accounts ads following a substantial increase in the previous months is actually superior to the revenue per 1,000 impressions achieved by Weixin Moments and substantially superior revenue per 1,000 impressions achieved by the two short-form video incumbents .
- Chief Strategy Officer James Mitchell in the Q4 FY22 earnings call
Author's bolded emphasis
I think this is a big deal as it suggests that Tencent has the potential and momentum to wrest share away from the market incumbents. To give a sense of scale: Douyin and Kuaishou are incumbents in the livestreaming e-commerce market that hold than 60% of GMV share. As shown earlier, the market size in 2023 is expected to be $723 billion. Let's be super conservative: assume no growth from $723 billion and that Tencent gains just 10% share; that leads to about $72 billion of incremental value. The December 2023 revenue base is expected to be $90 billion . So that implies an 8opportunity to increase revenues by at least 80%.
Overall, I believe there is great scope for Tencent to increase paying users and ARPU through greater penetration and engagement, which will only be augmented by additional features and R&D. Tencent is in heavy investment mode to mine its high-quality network of customers and businesses; it's R&D intensity is up to 11% of revenues compared to 9.7% a year ago.
Valuation
PE multiple approach
Tencent 1-yr fwd PE (Capital IQ, Author's Analysis)
Tencent is currently trading at a 23.3x 1-yr fwd PE, which corresponds to a 22.9% discount to its 14-year long term 1-yr fwd PE of 30.2x (taking data since the recovery of the global financial crisis ).
In my article on the OILK ETF ( OILK ), I shared data on China's demand recovery. Being a mega-cap consumer-focused company, Tencent would be a direct beneficiary of these macro trends. Add onto that the promising growth potential of the live-stream video powered advertising business and I think one can make a reasonable case for a premium to the average multiple of 30.2x.
Let's assume a target multiple of 35.0x. Applying the 2023 consensus EPS estimates of $2.30 to that, you would get an implied fair value share price of $80.50. That corresponds to a 63% upside from the current share price of $49.29.
Incremental sales multiple approach
In the previous section, under conservative assumptions that Tencent is able to capture 10% of a non-growing $723 billion market, we arrived at an incremental revenue potential of close to $72 billion. Tencent's current sales multiple is 6.0x . Let's conservatively value the $72 billion at just 4.0x sales. Then the incremental market capitalization addition would be $288 billion. Adding that to the current market capitalization of the company is $465 billion, you get a target equity value of $753 billion; again, close to a 62% upside from current levels.
Takeaway & Positioning
Livestream e-commerce is booming in China as the market is growing at close 40% annually. Tencent is the new kid on the block that is rapidly making in-roads as it captures this attractive growth opportunity by deepening engagement with its strong user base in China's leading messaging and social media app - WeChat. Importantly, Tencent's advertising ROI (revenue per impression) is outperforming China's incumbent livestreaming players, giving confidence in market share gains.
Very conservative assumptions of 0 growth in China's livestreaming market beyond 2023 and a mere 10% market share, Tencent would be worth more than 60% than what it trades today. A separate valuation route based on historical 1-yr forward PE also yields a similar upside of 60%.
Hence, I believe Tencent is a very compelling opportunity. I rate the stock a 'Strong Buy'.
For further details see:
Tencent: Don't Miss China's Livestream E-Commerce Boom