By TOM ORLIK
Selling Tiffany earrings and Louis Vuitton handbags to the wealthy is one way to play the emerging Chinese consumer trend. Internet company Tencent Holdings has shown that targeting online teenagers works just as well.
The secret of Tencent's success is the dominance of its QQ instant-messaging system. That isn't a money spinner itself, but it is a core part of the Internet experience for Chinese users. Tencent, which had 72% of active instant-messaging accounts in the first quarter, according to Internet research firm Analysys, has been able to take advantage of its position to win market share in more lucrative social-network and online-gaming activities.
iResearch says that is reflected in the rapid growth of Tencent's social network, Pengyou. From its launch in 2009 under a different brand, it has expanded to 100 million users today, in line with rival Renren and overtaking Kaixin101. Tencent's online games might not be any better than those developed by NetEase.com and Shanda Interactive Entertainment, but its user base means it can guarantee an army of fans. They either pay to play or to buy virtual items within the games themselves.
Tencent's users might be numerous, but they also are younger and less affluent than those of many of its rivals. At first sight, that looks like a source of weakness. In fact, it may be a source of strength. Yvonne Yang, China Internet analyst at BNP Paribas, says Tencent's teenage fan club has a higher willingness to spend online than the older, white-collar clientele of Kaixin or the urban elite users of Sina Weibo, a Twitter-like site.
For exposure to the China Internet sector, Tencent's user base and diversified offering makes it a better bet than its rivals in the social-networking and gaming spaces. A price/earnings ratio of 38 times is demanding, particularly as Tencent already has a market capitalization of $51 billion. But at least it has a strong track record of profitability, unlike Renren.
The risk is that specialty sites will gain more traction as the Chinese Internet sector matures. After all, Yahoo still has a powerful position in free email in the U.S. and once used it as a hook to build other businesses. But such traffic wasn't enough when Google and Facebook came of age.
Write to Tom Orlik at email@example.com