TIP695: The Story of Tencent: China's Tech Behemoth w/ Clay Finck

**SPEAKER_1** (0:00)
You're listening to TIP.

**Clay Finck** (0:03)
Hey everyone, welcome to The Investor's Podcast. I'm your host, Clay Finck. While the mainstream headlines often focus on the magnificent seven in the big tech giants, we're diving into the global powerhouse that often flies under the radar, Tencent. Since its IPO in 2004, shares of Tencent have increased by nearly 500 times, producing an average annual return of 35% per year.
Based in Shenzhen, China, Tencent is a giant in gaming, social media and cloud services. From the creation of WeChat, a super app with over 1 billion users, to investments in companies like Tesla, Spotify and Snapchat, Tencent's story is one of relentless innovation and strategic dominance. But what's truly fascinating is its founder, Pony Ma, whose low-profile leadership starkly contrasts his rival, Jack Ma from Alibaba. Today, we'll explore Tencent's meteoric rise, its cultural and political challenges, and how it managed to shape China's digital landscape. To help me do so, I'll be sharing the lessons I learned from the book Influence Empire by Lulu Chen in discussing the risks and opportunities of investing in a company so intertwined with the Chinese government. And just a quick disclaimer, I wanted to mention that there's plenty of commentary in the book about the CCP and the geopolitics between the US and China. The purpose of what's shared here in the episode isn't to push any political agenda, but to try and shed light on what's most important in this regard for us as investors. With that, let's get right to it.

**SPEAKER_1** (1:32)
Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Clay Finck.

**Clay Finck** (1:56)
While The Magnificent Seven dominates the headlines, I want to take a leap across the Pacific to dive into a Chinese tech giant that seemingly flies under the radar, Tencent. Tencent is one of the world's largest technology companies headquartered in Shenzhen, China. And known for its dominance in digital ecosystems, particularly gaming, social media, and cloud services. The company owns WeChat, a super app combining messaging, social media, payment services, and mini programs, which has over 1 billion monthly active users. They are also a global leader in video gaming, with ownership or stakes in companies like Riot Games, creator of League of Legends, Epic Games, creator of Fortnite, and Supercell, creator of Clash of Clans. Additionally, the company offers a suite of online services, including QQ, a popular instant messaging platform, and Tencent Video, one of China's largest video streaming platforms.
Tencent is also a significant investor holding stakes in numerous tech companies worldwide, such as Tesla, Reddit, Spotify, and Snapchat. Over the past decade, Tencent has grown its revenues by 24% per annum and earnings per share by 22% per annum. While they've seen their growth slow over the past couple of years, their price to free cash flow is 15, which is around the lowest it's ever been, and half its historical average. But these valuation levels don't totally go unnoticed by investors, as many are wary of the CCP's involvement in their business affairs. So during this episode, I wanted to uncover the story of Tencent and why it's largely flown under most investors' radar. To help me do so, I'll be covering a book called Influence Empire by Lulu Chen. Chen performed a number of insider interviews going into intense detail to accurately highlight the Tencent story. Tencent has largely flown under the radar by design. The billionaire founder, Ma Huateng, who goes by the English name Pony, intentionally shies away from media attention while historically his arch-nemesis, Alibaba founder, Jack Ma, is known for his high-profile personality. For simplicity's sake, I'll refer to this Tencent founder as Pony or Pony Ma during this episode, as Chen does in the book. The book also serves as a way for me to learn more about China and how the people there operate and think about business. I was recently chatting with a fund manager who had just visited China, and he explained to me that the country is likely much different and more capitalistic than most Americans would believe it to be, so I'd like to approach the subject with an open mind and a curiosity to learn more. And if you don't think it's possible to achieve good returns in China, I would encourage you to also check out episode number 661 with Richard Lawrence, who's compounded capital at 14.3% over 30 years investing in Asia, and over the past 10 years, he's been heavily allocated to Chinese stocks. The book highlights that China, in a sense, operates in a parallel universe, as one out of three web users aren't able to view sites like Facebook, Twitter or X, Snapchat, Instagram, The New York Times, and YouTube. China essentially has their own version of the tech names we know of here in the Western world. Even when a Chinese person travels outside of the country, if they're using a Chinese SIM card, they can't use a site like Google. Chen refers to WeChat as the Swiss Army knife of a super app that combines many functions all into one app. Two-thirds of Chinese people use a Tencent app for all sorts of services, from texting to shopping, watching videos, playing games, and ordering food and a taxi, making it also the ideal tool for mass surveillance. The way Chen puts it, the Communist Party finds the idea of Tencent both appealing and daunting. Pony Ma transformed from a carp leaping over the Dragon's Gate. Initially, he needed to avoid the CCP's immense powers they held over him, and over time, he inevitably became shackled to become part of the system that he wanted to change himself. Pony Ma was born in 1971 on China's southern island of Hainan, and when he was 13, his family would relocate to Shenzhen, which today is China's fourth largest city. In middle school, Pony Ma would meet three of his co-founders. And all four of them were really sharp students and had an obsession with STEM classes. When Pony Ma was at university, thousands of students took over the streets of Beijing, occupying the capital's iconic Tiananmen Square, demanding democracy and the freedom to write their own destinies. Many of our listeners might know that Li Lu participated in this protest before escaping the country. Not only is Li Lu an amazing investor, but he also has quite an amazing story, which I touched on back on episode 636 Due to Li Lu's involvement in the protest, he was put on the CCP's 21 most wanted student leaders, so just the fact that he was able to escape the country and do what he's done here in the US is quite remarkable. This protest led to the government rolling out tanks to put a stop to the movement. Pony Ma would major in computer science and rapidly earned a reputation as a computer maven. For his undergrad thesis, he created a software program to predict share price movements, and at the age of 22, he managed to sell the program to the company he was interning at for 50,000 won, which was about a 3 year salary for a fresh graduate. Pony Ma would work for a page maker company in his first job at a school. A page maker can really be thought of as an early version of a smartphone that would beep or vibrate letting someone know that they wanted to call you. In the 5 years he worked there, his salary increased by 8-fold and he became dissatisfied with being one of the many middle managers at the firm. During the 90s, he became infatuated with the internet and its potential. He set up 4 phones and 8 computers in his home, costing him essentially all of the money he had made from selling that stock market program, which highlighted his tendency to go all in on the things he was most passionate about. In 1998, Pony Ma reconnected with his old friend Tony Zhang, expressing interest in starting a company. The rough idea was to combine the product of a pager and that of the nascent internet. These two and three others would go on to start Tencent with seed capital of 500,000 won. A lot was happening in the startup world in 1999 Jack Ma started Alibaba, Steve Jobs introduced the iMac, Microsoft bundled its software and its Windows operating system, and Yahoo's Jerry Yang made it onto the cover of Time Magazine just before declining an offer to buy Google's search technology for 1 million dollars. The early days of Tencent were not easy, and they were just really scraping by. Two of the founders still worked a full-time job to help them pay the bills. Pony would then stumble on a service that would save the company, ICQ, which was an online chat system created by five Israelis in 1996 ICQ became the first widely adopted instant messaging platform and a Chinese telecom company was making bids for someone to develop a similar product in China. Thus began the story of Tencent's controversial origins, being a copycat. Just as many of China's largest internet companies started out by imitating their Western counterparts, Sohu from Yahoo, Baidu from Google, Weibo from Twitter, Alibaba from eBay, and Tencent's first hit came from ICQ.