Here are Tencent’s Best Investments

When most people think of Tencent Holdings Ltd (SEHK: 700), they think WeChat or online gaming.

WeChat (Weixin in Chinese) is used by over one billion people every month and Tencent is one of the world’s leading online game publishers.

Yet, while social networking and gaming are huge for Tencent, the company is also a pretty big investor too.

Lately, it’s also had some successes in the investing front. Here’s more on what investors should know as well as some of Tencent’s best investments so far.

Why Tencent invests in other companies

For Tencent, investing in other companies serves several purposes.

First, Tencent could potentially realise a higher rate of return on its capital if it invests in technology companies rather than government bonds.

Tencent itself comes from a technology background and the company has access to many smart investment bankers, both within its executive ranks and via investment banks.

Second, Tencent can diversify. Although many companies Tencent invests in are still in their growth stages, many of its investments will eventually mature and pay dividends for the company in future.

Third, Tencent could realise potential synergies between its investments and its own operations.  If Tencent invests in a company, that company could be more likely to use Tencent’s cloud services, for example.

Fourth, Tencent could use the investments to slow the rate of growth of potential competitors such as Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) or ByteDance.

Hypothetically, even if Tencent loses money on an investment, Tencent could be in better shape than it would otherwise if its investment slows the entry of a competitor into a sector that Tencent does well in (or wants to do well in).

This is important because some sectors in technology are winner-takes-all. So even a small difference could be the difference between massive market share and also-ran status.

With this said, here are some of Tencent’s best investments.

JD.com

In 2014, Tencent made the decision to fold much of its e-commerce operations into JD.com Inc (NASDAQ: JD) (SEHK: 9618) to cut ecommerce losses and gain scale.

Tencent also agreed to buy what was then 15% of JD.com for US$215 million and buy further shares at JD.com’s IPO price after the company debuted.

Although subsequent equity financing rounds have diluted Tencent’s original stake, Tencent’s purchase has been very profitable.

JD.com has more than tripled from its IPO price of US$19 per share (at the time of writing), generating billions in profit for Tencent.

Pinduoduo

Given that the group buying website Pinduoduo Inc (NASDAQ: PDD) grew very quickly and used WeChat to gain customers, it was only natural that Tencent invested in the company that showed a lot of potential.

Investing in Pinduoduo turned out to be a great decision for Tencent as the market values the company at over US$100 billion and Pinduoduo’s share price is at a near all-time high.

Tencent very likely has made billions on its investment given that the company bought many shares at substantially lower valuations.

Tencent reportedly invested in Pinduoduo at a US$15 billion valuation in 2018, for example. Through its investments, Tencent owns around 16.5% of Pinduoduo currently.

Meituan Dianping 

Tencent has also likely made billions on another e-commerce investment, Meituan Dianping (SEHK: 3690).

Meituan shares have taken off from their March levels in 2020 and the stock is near an all-time high. Meituan shares have around tripled from its IPO price of HK$69 in 2018.

Foolish conclusion

Tencent has realised a lot of value from its investments. Not only have the investments increased value in Tencent, but also the investments have arguably slowed Alibaba’s momentum.

This could matter a lot in winner-takes-all markets both now and in the future.

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