Gaming first took off in the early 2000s, as online games became increasingly popular, pulling in a new wave of users and development companies. China has grown into one of the world’s the most lucrative markets for gaming. The market is still getting larger. The industry is expected to grow from US$66.1 billion in 2024 to US$95.5 billion by 2029, at a compound annual growth rate of 7.63% [1]. The rise of eSports has also played a key part in this gaming boom, with competitive gaming events drawing big audiences and massive investment. E-sports stars can fill stadiums. In recent years, mobile gaming has proliferated, especially mini-games within apps like WeChat, which has broadened the total addressable market as well.
Emergence of a global gaming giant in Tencent
China’s rapid growth in online gaming has proved a boon for Tencent, one of China’s highest quality, diversified internet companies, which has a deep understanding of the Chinese consumer and a highly competent management team.
Gaming is the largest contributor to Tencent’s revenue, with the company maintaining a substantial market share of approximately 50% of the Chinese gaming industry. Unlike most game developers who conduct expensive and tedious internal tests with hundreds of players, Tencent leverages the extensive broadband and mobile network coverage across the Chinese mainland to engage directly with its customers in real-time.
Tencent owns a vast network (hundreds) of gaming studios, including Timi, Riot Games and Supercell. It has a collection of long-running, popular titles that make revenue streams for the gaming business more visible, such as Honor of Kings and PUBG Mobile. This sets the company apart from other game developers who often rely on hit-or-miss titles. Tencent has also built up its capabilities through mergers and acquisitions (M&A) and licensing deals, enabling it to also grow the international gaming business.
Tencent’s powerful digital ecosystem creates seamless connections and enhances value for users
Aside from Tencent’s online gaming edge, the company is also the largest operator of instant messaging and social networking services in China. Tencent’s integrated social platforms, such as WeChat/Weixin and QQ, boast over 1.3 billion [2] and 768 million [3] monthly active users. In the advertising space, Tencent has effectively monetised the massive WeChat ecosystem. It has introduced features like Moments, where users can share pictures and statuses, similar to Facebook. Recently, the company has introduced short-form videos, which have increased user engagement and created more advertising opportunities. Tencent has also been at the forefront of artificial intelligence (AI) investments, monetising some of the many use cases of AI.
Commitment to increasing buybacks and dividends on back of sustainable value creation
We like Tencent’s track record of a strong balance sheet, its ability to fund expansion and M&A activities, and its consistent free cash flow generation over the years. The company’s history of successful new product monetisation further underscores its long-term growth prospects. We anticipate that cash flow generation will remain robust, given Tencent’s strong market position, revenue growth across operating segments, and significant margin expansion. In the first quarter of 2024, Tencent announced its commitment to return excess capital to shareholders through share repurchases and dividends, emphasising that these activities will be funded by its ample cash generation.
Tencent’s average payout ratio was 11% in 2014-2021, but it increased to 17%-18% in 2022-2023. Assuming Tencent maintains such a dividend payout level of 18% for 2024-35E, supported by its strong cash flow and commitment to shareholder returns, then Goldman Sachs has forecast that Tencent’s dividend should rise from HK$4.5 per share in 2024E to HK$15.2 per share in 2035E. It also expects Tencent to continue repurchasing shares, with a reduction of 2% in the total share count each year over 2024-35E [4].
Chart 1: Tencent’s total shareholder return and earnings are growing
Tencent is a stock held widely across abrdn’s Asia and Emerging Market (EM) equities desk, including in our EM income, Asia Pacific ex. Japan and All China strategies as of 24 November 2024.
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Alex Smith | Leo Morawiecki |
Head of Equities Investment Specialists, Asia Pacific | Associate Fixed Income Investment Specialist |
Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
- Gaming Industry in China Size & Share Analysis - Growth Trends & Forecasts (2024 - 2029) – Mordor Intelligence
- Weixin/WeChat - Tencent
- QQ - Tencent
- China Resilience – Tencent Holdings, Goldman Sachs Global Investment Research, 16 October 2024